Updated on March 18th, 2024 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 Top 5 Low Beta Stocks
- Final Thoughts
The Evidence for Low Beta Stocks 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.
Related: The S&P 500 Stocks With Negative Beta.
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. 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 Top 5 Low Beta Stocks
The following 5 low beta 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. Unum Group (UNM)
Unum Group is an insurance holding company that provides a broad portfolio of financial protection benefits and services. The company operates through its Unum US, Unum UK, Unum Poland, and Colonial Life businesses, providing disability, life, accident, critical illness, dental and vision benefits to millions of customers. The company generated $10 billion in revenue last year.
In late January, Unum reported (1/30/24) financial results for the fourth quarter of fiscal 2023. It grew its operating earnings-per-share 25% over the prior year’s quarter, from $1.43 to $1.79, thanks to strong growth of sales and premiums in its core segments and favorable trends in the Group Disability category.
Adjusted book value per share grew 13%. Thanks to sustained business momentum, Unum provided guidance for 5%-7% growth of premiums and 7%-9% growth of earnings-per-share in 2024.
UNM has a Beta score of 0.40.
Click here to download our most recent Sure Analysis report on UNM (preview of page 1 of 3 shown below):
4. AT&T Inc. (T)
AT&T is a large telecommunications company serving over 100 million customers. The company generated $122 billion in revenue in 2023.
In late January, AT&T reported (1/24/24) financial results for the fourth quarter of fiscal 2023. The company grew its revenue 2% over the prior year’s quarter thanks to strong customer additions across its growing 5G wireless and fiber networks. AT&T is investing in the expansion of its 5G and fiber networks at a record pace.
It posted 273,000 fiber net additions and thus it has posted more than 200,000 additions per quarter for 16 consecutive quarters. It also posted 526,000 postpaid phone net additions. Adjusted earnings-per-share dipped -11%, from $0.61 to $0.54, but free cash flow grew from $2.6 billion to $6.4 billion.
T has a Beta score of 0.36.
Click here to download our most recent Sure Analysis report on AT&T (preview of page 1 of 3 shown below):
3. Walmart Inc. (WMT)
Walmart is the largest retailer in the world, serving more than 230 million customers each week. Revenue should be around $668 billion this year. Walmart has increased its dividend for 51 consecutive years, making it a member of the prestigious Dividend Kings.
Walmart posted fourth quarter and full-year earnings on February 20th, 2024, and results were quite strong, as well as good guidance that sent shares rising to a new high. Adjusted earnings-per-share came to $1.80, which was 15 cents ahead of expectations. Revenue was up 5.7% to $173.4 billion, which beat estimates by more than $4 billion. The company noted global e-commerce sales soared 23% year-over-year.
WMT has a Beta score of 0.34.
Click here to download our most recent Sure Analysis report on Walmart (preview of page 1 of 3 shown below):
2. Consolidated Edison (ED)
Consolidated Edison is a holding company that delivers electricity, natural gas, and steam to its customers in New York City and Westchester County. The company has annual revenues of more than $14 billion.
On February 15th, 2024, Consolidated Edison announced fourth quarter and full year results for the period ending December 31st, 2023. For the quarter, revenue decreased 14.6% to $3.44 billion, which was $224 million below estimates. Adjusted earnings of $346 million, or $1.00 per share, compared to adjusted earnings of $288 million, or $0.81 per share, in the previous year. Adjusted earnings-per-share were $0.03 better than expected.
ED has a Beta score of 0.29.
Click here to download our most recent Sure Analysis report on Consolidated Edison (preview of page 1 of 3 shown below):
1. Johnson & Johnson (JNJ)
Johnson & Johnson is a diversified health care company and a leader in the area of pharmaceuticals and medical devices. The company has annual sales in excess of $93 billion.
Johnson & Johnson’s key competitive advantage is the size and scale of its business. The company is a worldwide leader in several healthcare categories. Johnson & Johnson’s diversification allows it to continue to grow even if one of the segments is underperforming.
The company has increased its dividend for 60 consecutive years, making it a Dividend King. The stock is owned by many well-known money managers. For example, J&J is a Kevin O’Leary dividend stock.
JNJ has a Beta score of 0.27.
Click here to download our most recent Sure Analysis report on JNJ (preview of page 1 of 3 shown below):
Final Thoughts
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.
At Sure Dividend, we often advocate for investing in companies with a high probability of increasing their dividends each and every year.
If that strategy appeals to you, it may be useful to browse through the following databases of dividend growth stocks:
- The Dividend Aristocrats List: dividend stocks with 25+ years of consecutive dividend increases
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 56 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500. - The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.