Low-Volatility Dividend Aristocrats or Long-Term Government Bonds? - Sure Dividend Sure Dividend

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Low-Volatility Dividend Aristocrats or Long-Term Government Bonds?


Published 7/7/14

The Long-Term US Treasury bond ETF (TLT) has a standard deviation of 14.18% and a dividend yield of 2.92%.  Low volatility Dividend Aristocrat stocks offer similar yields, with slightly higher volatility in addition to capital appreciation.  Today’s artificially low interest rate environment makes low volatility dividend aristocrat stocks an attractive investment versus long-term bonds.

The 5 lowest volatility Dividend Aristocrats are listed below.  You can download the complete list of Dividend Aristocrats sorted by volatility here:

5 Lowest Volatility

Match Bond Volatility with Stocks

An equally weighted portfolio of the stocks above has a standard deviation of 16.44%, with a dividend yield of 3.30%.  By holding about 14% cash, you can create a portfolio of these 5 stocks that has a standard deviation equal to that of long-term government bonds, with a yield of 2.84%; nearly the same as long-term government bonds.  In exchange for a very small .08% of yield and no volatility change, you get income growth and capital appreciation over time.

Stock/Bond Trade-Off

The downside to switching your long-term bond holdings into low-volatility dividend aristocrats is you lose an asset class that has historically done well during recessions.  If interest rates rise, however, long-term bond prices will fall, resulting in a loss of capital.  It is very likely that interest rates will rise in the future.  The exact date rates will begin to rise is unknowable, but we are at historically low interest rates now.

Interest Rates

Source:  Multpl.com

Overview of Lowest Volatility Dividend Aristocrats

Johnson & Johnson (JNJ)

Johnson & Johnson was founded in 1886 and became publicly traded in 1944.  The company has increased dividends for 52 consecutive years, one of the longest active streaks of any business.  Johnson & Johnson is the largest health care business in the world.  The company ‘s revenues are split between pharmaceuticals, medical devices and diagnostics, and consumer products.

JNJ Sales by Segment

Source:  Johnson & Johnson 2013 Annual Report

Johnson & Johnson has the lowest volatility of any Dividend Aristocrat.  The company operates in the relatively recession resistant health care sector, and its health care revenues are very well diversified.  The company holds several strong brands, has an above average dividend yield, and an extremely long history of rewarding shareholders.

Consolidated Edison (ED)

Consolidated Edison provides electricity and gas to consumers in New York City and Westchester county.  The company has increased its dividend for 40 consecutive years.  Consolidated Edison’s low volatility is due to the company operating in the extremely stable electric and gas utility industry.

PepsiCo (PEP)

PepsiCo is immediately recognized for its flagship Pepsi soda brand.  The company sells much more than just Pepsi.  Pepsico has 22 brands with over $1 billion per year in sales.

Pepsi 22 Brands

Source:  Pepsi Official Website

PepsiCo has a dividend yield around 3%.  The company’s low volatility comes from its strong brand snack and beverage brands and its ability to remain profitable throughout recessions.   PepsiCo offers shareholders dividends, growth and stability.

Kimberly-Clark (KMB)

Kimberly-Clark is a global consumer products company with 5 brands that generate over $1 billion per year in sales: Huggies, Kotex, Kleenex, Pull Ups, & Scott.  The company sells products in 175 countries, and 25% of the world’s population uses Kimberly-Clark products.

Kimberly-Clark’s low volatility comes from its strong brands in products that consumers use and dispose of continuously.  The Kleenex brand in particular is so ubiquitous that all brands of tissues are commonly referred to as ‘Kleenex’.   Kimberly-Clark has a dividend yield around 3%, offering shareholders stability, income, and growth.

Procter & Gamble (PG)

Procter & Gamble is the largest personal products business in the world.  The company sells branded consumer products out of its 5 divisions: beauty, grooming, health care, fabric care and home care, and baby care and family care.

Profits & Revenues by Division

Source:  Procter & Gamble 2013 Annual Report

Procter & Gamble has increased its dividend for 58 consecutive years.  The company currently yields over 3%, has low volatility, and offers both income and capital appreciation potential.

Build a Better Portfolio

Of the 5 lowest volatility dividend aristocrats, Pepsico and Kimberly-Clark are ranked in the Top 10 based on the 8 Rules of Dividend Investing.

Low volatility businesses tend to have few questions about where future growth will come from. Low volaitlity shows that future cash flows are not in question and are more predictable than high volatility stocks. Low volatility stocks have managed to outperform the overall stock market by 2 percentage points per year over a 20 year period.

 


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