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The Best Way To Profit From Low-Volatility Stocks
3/26/2013 3:30:00 PM
As someone who works in finance, I talk to investors on a dailybasis . While some are experiencing success, others are struggling just to stay in the game. Each one of them has a different way ofinvesting , but they all have the same complaint.
In fact, in the past four years, this bone of contention about themarket has only become more prominent. I'm talking about low volatility in thestock market.
Although it may seem counterintuitive, the discontent surrounding the market's low volatility is a realissue today. On one hand, investors do want toput theirmoney in low-riskstocks . On the other hand, the current low-volatility environment isn't a result of a healthy market per se -- it is a direct result of the 2008 stock market crash, which resulted in fewer investors with less money to invest.
It all started with the tech crash of 2000, which left many investors' portfolios devastated. These same investors persisted, and were able to rebuild their portfolios until the markets were smacked down again in 2008 and many, once again, sustained brutal losses.
Now, these investors have either spent their investablecash on simply surviving or are afraid to re-enter the stock market altogether.
If you can't beat them, then join them
History has shown that low-volatility stocks produce higher returns over time than riskier ones. However, during strongbull markets as is the case now, low-volatility stocks oftenunderperform .
Take a look at the chart of the iPath S&P 500VIX STFutures ETN ( VXX ) , which replicates the S&P 500VIX Short-Term Futures Total ReturnIndex . The index reflects the implied volatility of the S&P 500 Index.
So rather than complaining about the market's low volatility,
investors should use it to their advantage by buying
low-volatility stocks that pay consistent dividends.
1. Wal-Mart (
The phenomenal growth has resulted in its dividend increasing 98% in the past five years. The king of all retailers has a 30-year record of consistently paying dividends. The stock yields nearly 3% and has a 23%payout ratio .
Shares have kept pace with the S&P 500 so far this year, climbing about 6%.
During the past year, Wal-Mart has increased itsearnings from $4.55 to $5.02 a share.Analysts have projected an additional earning increase to $5.35 this year. In addition, a recent foray into social media and mobile solutions called @WalmartLabs assures the company's ability to morph with the changing retail landscape.
Technically, shares have pushed above resistance at $74 and
are quickly moving toward all-time highs above $75. Technical
resistance is likely at the all-time highs, so waiting for a
pullback to the $72support level or buying on a breakout close
above the $75 range makes sense.
The payout ratio is around 50%, which isn't cause for worry in and of itself. But if it continues to increase, it lowers the chances that dividend growth will continue.
The company's price-to-earnings (P/E ) ratio is 18 -- higher than the average of 14 for the S&P 500 but the low end for restaurant stocks. An added bonus to owning this low-volatility kingpin is that it is the second-largest holding in the Bill and Melinda Gates Foundation's $17 billion charitable trust.
Risks to Consider: Low-volatility stocks tend to underperform during bull markets but have been proven to hold their own duringbearish periods. But so far this year, many low volatility stocks have kept pace with the overall market. How long this can be expected to continue is anyone's guess. Remember, anything can happen, even with the most solid companies. Always use stops and position size properly when investing.
Action to Take --> Both of these low-risk dividend payers have solid fundamental and technical reasons for investment. History tells us both companies should hold up should the market fall with higher volatility. Wal-Mart is a buy on a breakout close above $75, for a 12-month target price of $80. McDonald's is a buy on a breakout close above $100, and my 12-month target on McDonald's is $105.