Bear markets like 2022 generally leave investors with few places to hide. Most stocks are priced with some growth in mind, and as such most stocks fall when fears of a recession or higher interest rates hit. However, there are some stocks that can have a diversifying effect on one’s portfolio as they tend to move separately from the broader market.
One way to measure this diversifying component is beta, which is a measure of a security’s volatility versus a benchmark. In this case, we can measure the beta of stocks against the S&P 500, which gives us a measure of each stock’s volatility compared to simply owning the S&P 500 through an index fund.
With that in mind, let’s look at three stocks that not only have low betas, but also high dividend yields. This combination of factors makes them attractive to hold during bear markets.
An appetizing beta
Our first stock is McDonald’s (MCD), the ubiquitous owner and franchisor of McDonald’s restaurants in the US and internationally. The chain offers its famous selection of sandwiches, fries, drinks, side dishes and more. It operates or franchises approximately 40,000 stores worldwide, only a small proportion of which are company-owned.
Founded in 1940, McDonald’s has annual sales of approximately $23 billion and trades with a market capitalization of $200 billion.
McDonald’s stock has a five-year beta of 0.65, meaning it moves generally in the same direction as the S&P 500 over long periods of time, but at 65% of the magnitude. In practice, that means McDonald’s would theoretically fall 6.5% if the S&P 500 falls 10%.
In practice, McDonald’s is up about 1% so far in 2022, while the S&P 500 is down 17%. That’s the power of holding diversified, low-beta stocks.
McDonald’s also has a very impressive 47-year streak of dividend increases, which puts it in rare company in that regard. The payout ratio is currently just over 60% of earnings, making the dividend very safe, especially given the company’s reliable earnings and earnings. The yield is currently 2.2%, which is about 60 basis points better than the S&P 500.
We’re also projecting 6% annualized earnings growth for the foreseeable future, which means McDonald’s should have plenty of opportunity to keep growing its dividend for many years to come.
Despite the fact that McDonald’s operates in a generally very cyclical sector — restaurants — its well-established position and value proposition means its earnings hold up much better in recessions than most of its peers. In fact, McDonald’s tends to gain market share during recessions because of its value proposition, so we see McDonald’s as a strong performer even in a recession.
Clean up your portfolio
Our next stock is Clorox (CLX), a company that manufactures and sells a wide range of household and professional cleaning products worldwide. The Company operates through four segments: Health and Wellness, Home, Lifestyle and International. Through these segments, Clorox sells its namesake Clorox cleaning products, but also has a long list of other cleaning products, grocery products, vitamins and nutritional supplements, and pet supplies and more.
Founded in 1913, Clorox has annual sales of approximately $7.1 billion and a current market capitalization of just over $18 billion.
Clorox has a 5-year beta of just 0.29, meaning it tends to move largely independently of the S&P 500. This stock therefore has a significant diversifying effect on one’s portfolio, which is particularly useful in bear markets. So far in 2022, Clorox has roughly outperformed the S&P 500 with a stock return of -16%.
Clorox also has a nearly 50-year dividend streak, meaning it’s also exemplary in terms of dividend longevity. The company’s payout ratio is actually above earnings for the year, but that should only be temporary. Clorox has seen a boom during the pandemic, which is leveling off to some extent. We see normalized earnings in the coming years as earnings growth of 12% from current low levels should make the dividend more sustainable again.
Clorox yields 3.2% today, which is about double the S&P 500, so it’s also a strong income stock.
After all, Clorox mostly sells staples, which means recessions do little to dampen demand. That means it holds up well in bear markets and recessions.
A dividend king in waiting
Our final stock is Walmart (WMT), the renowned value leader in general retail. The company’s stores number more than 10,000 worldwide and collectively serve hundreds of millions of people each year with groceries, pantry items, home, automotive, gardening products and more.
Founded in 1945, Walmart generates a whopping $600 billion in annual sales and trades with a market cap of $417 billion.
Walmart’s five-year beta is 0.53 against the S&P 500, putting it somewhere between McDonald’s and Clorox in terms of its diversification impact. Walmart is up 6% this year and has beaten the S&P 500 by about 23% in 2022.
The company has a 49-year streak of dividend increases, and we expect the next dividend the company announces will make it a Dividend King. The payout ratio is extremely low at just 38%, so the dividend has many years of likely increases ahead of it. We also see earnings growth of 8% over the coming years, meaning Walmart is likely to be a robust dividend growth stock for years to come.
The yield is roughly in line with the S&P 500, so it’s not quite the income-only stock that, for example, Clorox is.
Finally, Walmart is known in the investment community for its resilience to recessions, as it represents the ultimate value proposition for physical retail. The company’s low pricing strategy means it performs very well in all sorts of economic conditions.
Final Thoughts
While bear markets can be difficult to manage, there are strategies investors can use to minimize the negative impact. Finding great, low-beta dividend stocks — like McDonald’s, Clorox, and Walmart — can offer investors a safe haven in terms of low volatility and low income.
For example, in 2022, these three stocks would have returned equally -3% excluding dividends and would have a 2.3% return. Those percentages compare fairly favorably to the S&P 500’s -17% price return and 1.6% yield. That’s the power of low-beta stocks, and we like these three for that reason during a tough bear market in 2022.
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