Updated on July 23rd, 2021 by Bob Ciura
In the world of investing, volatility matters. Investors are reminded of this every time there is a downturn in the broader market and individual stocks that are more volatile than others experience enormous swings in price.
Volatility is a proxy for risk; more volatility generally means a riskier portfolio. The volatility of a security or portfolio against a benchmark is called Beta.
In short, Beta is measured via a formula that calculates the price risk of a security or portfolio against a benchmark, which is typically the broader market as measured by the S&P 500.
Here’s how to read stock betas:
- A beta of 1.0 means the stock moves equally with the S&P 500
- A beta of 2.0 means the stock moves twice as much as the S&P 500
- A beta of 0.0 means the stocks moves don’t correlate with the S&P 500
- A beta of -1.0 means the stock moves precisely opposite the S&P 500
Interestingly, low beta stocks have historically outperformed the market… But more on that later.
You can download a spreadsheet of the 100 lowest beta stocks (along with important financial metrics like price-to-earnings ratios and dividend yields) below:
This article will discuss beta more thoroughly, why low-beta stocks tend to outperform, and provide a discussion of the 5 lowest-beta dividend stocks in the Sure Analysis Research Database. The table of contents below allows for easy navigation.
Table of Contents
- The Evidence for Low Beta Outperformance
- How To Calculate Beta
- Beta & The Capital Asset Pricing Model (CAPM)
- Analysis On The 5 Lowest-Beta Dividend Stocks
- Final Thoughts
The Evidence for Low Beta Outperformance
Beta is helpful in understanding the overall price risk level for investors during market downturns in particular. The lower the Beta value, the less volatility the stock or portfolio should exhibit against the benchmark. This is beneficial for investors for obvious reasons, particularly those that are close to or already in retirement, as drawdowns should be relatively limited against the benchmark.
Importantly, low or high Beta simply measures the size of the moves a security makes; it does not mean necessarily that the price of the security stays nearly constant. Indeed, securities can be low Beta and still be caught in long-term downtrends, so this is simply one more tool investors can use when building a portfolio.
The conventional wisdom would suggest that lower Beta stocks should underperform the broader markets during uptrends and outperform during downtrends, offering investors lower prospective returns in exchange for lower risk.
However, history would suggest that simply isn’t the case. Indeed, this paper from Harvard Business School suggests that not only do low Beta stocks not underperform the broader market over time – including all market conditions – they actually outperform.
A long-term study wherein the stocks with the lowest 30% of Beta scores in the US were pitted against stocks with the highest 30% of Beta scores suggested that low Beta stocks outperform by several percentage points annually.
Over time, this sort of outperformance can mean the difference between a comfortable retirement and having to continue working. While low Beta stocks aren’t a panacea, the case for their outperformance over time – and with lower risk – is quite compelling.
How To Calculate Beta
The formula to calculate a security’s Beta is fairly straightforward. The result, expressed as a number, shows the security’s tendency to move with the benchmark.
For example, a Beta value of 1.0 means that the security in question should move in lockstep with the benchmark. A Beta of 2.0 means that moves in the security should be twice as large in magnitude as the benchmark and in the same direction, while a negative Beta means that movements in the security and benchmark tend to move in opposite directions or are negatively correlated.
In other words, negatively correlated securities would be expected to rise when the overall market falls, or vice versa. A small value of Beta (something less than 1.0) indicates a stock that moves in the same direction as the benchmark, but with smaller relative changes.
Here’s a look at the formula:
The numerator is the covariance of the asset in question with the market, while the denominator is the variance of the market. These complicated-sounding variables aren’t actually that difficult to compute – especially in Excel.
Additionally, Beta can also be calculated as the correlation coefficient of the security in question and the market, multiplied by the security’s standard deviation divided by the market’s standard deviation.
Finally, there’s a greatly simplified way to calculate Beta by manipulating the capital asset pricing model formula (more on Beta and the capital asset pricing model later in this article).
Here’s an example of the data you’ll need to calculate Beta:
- Risk-free rate (typically Treasuries at least two years out)
- Your asset’s rate of return over some period (typically one year to five years)
- Your benchmark’s rate of return over the same period as the asset
To show how to use these variables to do the calculation of Beta, we’ll assume a risk-free rate of 2%, our stock’s rate of return of 7% and the benchmark’s rate of return of 8%.
You start by subtracting the risk-free rate of return from both the security in question and the benchmark. In this case, our asset’s rate of return net of the risk-free rate would be 5% (7% – 2%). The same calculation for the benchmark would yield 6% (8% – 2%).
These two numbers – 5% and 6%, respectively – are the numerator and denominator for the Beta formula. Five divided by six yields a value of 0.83, and that is the Beta for this hypothetical security. On average, we’d expect an asset with this Beta value to be 83% as volatile as the benchmark.
Thinking about it another way, this asset should be about 17% less volatile than the benchmark while still having its expected returns correlated in the same direction.
Beta & The Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model, or CAPM, is a common investing formula that utilizes the Beta calculation to account for the time value of money as well as the risk-adjusted returns expected for a particular asset.
Beta is an essential component of the CAPM because without it, riskier securities would appear more favorable to prospective investors as their risk wouldn’t be accounted for in the calculation.
The CAPM formula is as follows:
The variables are defined as:
- ERi = Expected return of investment
- Rf = Risk-free rate
- βi = Beta of the investment
- ERm = Expected return of market
The risk-free rate is the same as in the Beta formula, while the Beta that you’ve already calculated is simply placed into the CAPM formula. The expected return of the market (or benchmark) is placed into the parentheses with the market risk premium, which is also from the Beta formula. This is the expected benchmark’s return minus the risk-free rate.
To continue our example, here is how the CAPM actually works:
ER = 2% + 0.83(8% – 2%)
In this case, our security has an expected return of 6.98% against an expected benchmark return of 8%. That may be okay depending upon the investor’s goals as the security in question should experience less volatility than the market thanks to its Beta of less than 1. While the CAPM certainly isn’t perfect, it is relatively easy to calculate and gives investors a means of comparison between two investment alternatives.
Now, we’ll take a look at five stocks that not only offer investors low Beta scores, but attractive prospective returns as well.
Analysis On The 5 Lowest-Beta Dividend Stocks
The following 5 stocks have the lowest (but positive) Beta values, in ascending order from lowest to highest. They also pay dividends to shareholders. We focused on Betas above 0, as we are still looking for stocks that are positively correlated with the broader market:
5. Quest Diagnostics (DGX)
Quest Diagnostics operates in the healthcare sector. Quest is a major diagnostics leader that serves one-third of American adults and half the physicians and hospitals in the United States each year. The company generates over $9 billion in annual revenue.
Source: Investor Presentation
The company recently reported its fiscal-second quarter results. Second quarter revenues of $2.55 billion rose 40% from 2020. Adjusted earnings-per-share more than doubled from the same quarter last year.
For 2021, the company expects full-year revenue between $9.54 billion to $9.79 billion, which would represent a 1.1% to 3.7% increase for the full year. Adjusted earnings-per-share are expected in a range of $10.65 to $11.35 for 2021.
Quest Diagnostics has a significant competitive advantage, which is its leadership position in a large (and growing) market. Quest estimated the 2019 lab market to be worth $82 billion, and the company expects the market to continue growing at a 2% to 3% annual rate.
DGX has a 5-year Beta score of 0.23.
4. ViacomCBS (VIAC)
ViacomCBS Inc. is an American multinational media conglomerate that was formed via the re–merger of CBS Corporation and Viacom on December 4, 2019, the two created from the split of the original Viacom in 2005. The Company’s content brands include CBS, Showtime Networks, Paramount Pictures, Nickelodeon, MTV, Comedy Central, BET, and more.
The company has six different revenue segments, where Advertising, Affiliate, and Content Licensing are the most significant revenue source for the company. ViacomCBS generated more than $25 billion in revenues in fiscal 2020.
2021 is off to a good start for the company, as it is generating strong growth from its streaming properties.
Source: Investor Presentation
With Viacom and CBS’s merger now completed, the company is one of the most significant content producers and providers globally. This allows ViacomCBS to be in a solid position as content demand continues to grow. We estimate a five–year expected growth rate of 3% as management continues to integrate both companies.
VIAC has a 5-year Beta of 0.25.
3. J.M. Smucker (SJM)
J.M. Smucker company has grown into an international powerhouse of packaged food and beverage products including iconic names like Smucker’s, Jif, Folgers, along with pet food brands like Milk Bone, Meow Mix, Kibbles ‘n Bits and 9Lives. The company generated $8 billion in sales last year. Smucker’s focuses on pet food, coffee and snacking.
Source: Investor Presentation
On June 3rd, Smucker reported fiscal fourth-quarter and full fiscal year financial results. For the fourth quarter, sales declined 8% to $1.92 billion, as the company faced tough comparable numbers related to consumer stockpiling during the coronavirus pandemic last year. Adjusted operating income equaled $312 million, while earnings-per-share fell 32% year-over-year.
For the fiscal year, revenue of $8 billion grew 2.6% from fiscal 2020. Earnings-per-share of $7.79 increased 14% year-over-year. For the upcoming fiscal year, Smucker expects a 2% to 3% sales decline, with adjusted EPS in a range of $8.70 to $9.10.
SJM is a blue chip stock with a 3.1% dividend yield.
SJM has a 5-year Beta score of 0.32.
2. FirstEnergy (FE)
FirstEnergy is an electric utility. It operates Regulated Distribution and Regulated Transmission businesses. It owns and manages hydroelectric, coal, nuclear, natural gas, and renewable energy power generating facilities.
Its 10 electric distribution companies form one of the nation’s largest investor–owned electric systems, serving customers in Ohio, Pennsylvania, New Jersey, West Virginia, Maryland, and New York. The company serves approximately 6 million customers.
On April 22nd, 2021, FirstEnergy announced its Q1 results for the period ending March 31st, 2021. For the quarter, revenues were $2.73 billion, a marginal increase of 0.63% year-over-year, while EPS came in at $0.69, 4.5% higher compared to Q1–2020. Revenues benefited from higher residential usage, including a positive impact from weather compared to the same period in 2020, investment–related gains, and the implementation of a higher base distribution rate in New Jersey.
FirstEnergy reaffirmed its full–year operating earnings guidance of $2.40 to $2.60 per share. Additionally, management ensured investors that it remains on track to achieve annualized operating earnings growth from 5% to 7% through 2023.
FE has a 5-year Beta of 0.38.
1. General Mills (GIS)
General Mills is a packaged food giant, with more than 100 brands and operations in more than 100 countries. It produces a number of cereal brands such as Cheerios. It also has brands outside cereal including Haagen Dasz, Yoplait, Betty Crocker, Pillsbury, Blue Buffalo, and many more.
General Mills has worked aggressively to reduce debt since the $8 billion acquisition of Blue Buffalo. This deleveraging has allowed the company to return to increasing its dividend.
Source: Investor Presentation
In late June, General Mills reported (6/30/21) financial results for the fourth quarter of fiscal 2021. Net sales fell –10% and organic sales fell –6%, reflecting the comparison against the surge in at–home food demand at the outset of the pandemic last year. Adjusted earnings–per–share decreased –19%, from $1.12 to $0.91.
For the full fiscal 2021, General Mills posted record earnings–per–share thanks to the surge in at–home food demand amid the pandemic. On the other hand, the company will face tough comparisons this year, as the pandemic subsides.
The company expects a –1% to –3% decrease in organic sales in fiscal 2022 and adjusted earnings–per–share between flat and –2% for the upcoming year.
Shares currently yield 3.5%.
GIS has a 5-year Beta of 0.38.
Investors must take risk into account when selecting from prospective investments. After all, if two securities are otherwise similar in terms of expected returns but one offers a much lower Beta, the investor would do well to select the low Beta security as they may offer better risk-adjusted returns.
Using Beta can help investors determine which securities will produce more volatility than the broader market and which ones may help diversify a portfolio, such as the ones listed here.
The five stocks we’ve looked at not only offer low Beta scores, but they also offer attractive dividend yields. Sifting through the immense number of stocks available for purchase to investors using criteria like these can help investors find the best stocks to suit their needs.