As bad as the debt problems in Europe seem, we have a bad feeling that the situation is even worse than any of us expect.
Last Friday, Standard & Poor's downgraded their ratings on nine Europen countries as efforts to fight the crisis have fallen drastically short. Most notably, S&P lowered the top ratings of France and Austria one level to AA+, leaving Germany the Euro area's only stable AAA grade.
Bill Gross added to the fire this weekend by predicting that Greece will default following the S&P downgrades.
The global economy is being weighed down by a debt problem that took over two decades to create.
click to enlarge
Source: Citigroup
The leverage that has built up in the system will not unwind for years to come and it will continue to provide significant uncertainty and market volatility.
As central banks drive down short-term rates to deal with high debt levels and low growth rates, investors have been flocking to dividend stocks in search of yield. That said, any pullback in the market should be an opportunity to add to your low-beta dividend stock positions.
In the current market environment, it is important for income investors to choose their dividend stocks wisely as they are putting new money to work. As volatility increases (especially downside volatility), investors may want to add some low beta stocks to their holdings to help dampen portfolio volatility. In general, companies with low betas will tend to be less volatile than the general market.
With that in mind, we did a screen with the following parameters to find companies that had decent dividend yields with low betas:
- Dividend Yield > 3.5%
- Stock Price > $10.00
- Market Cap > $1 billion
- Beta < 0.60
The stocks below meet the parameters above. Use this data as a starting point for your own analysis.
While this is not an exhaustive list of low beta dividend stocks, this sample portfolio would yield 6.7% with an average beta of 0.35.
It should be noted that REITs, like Annaly Capital Management (NLY), have a much different risk reward profile than the other stocks on the list. Even though the REITs have ultra low betas (and also meet the rest of our screen parameters), the asset class certainly carries more risk (hence the 14%+ yields).
That said, we actually like the risk/reward profile of NLY in particular, but we caution investors to do their homework before investing in mREITs. We have written several articles on the sector, including this one.
Tactical Strategy
Due to the current market rally (which we believe will be short lived), investors should consider waiting for a pullback in these stocks to enter a new position or to add to an existing position.
Most of the stocks above are currently in a positive uptrend. As such, investors should be looking for near-term areas of support as potential entry points. Below are a couple of examples:
Abbott (ABT) should get some decent support in the $54.00 range. As shown in the chart above, the upward trend line and the 50-day moving average ($54.11) are converging in that area (see green box). Additional support will likely be found at the 200-day moving average ($51.48). We think that $52.00-$54.00 would be a great near-term entry point for ABT.
Altria (MO) has been trading in an upward range the past few months and we believe that this trend will continue for the stock as investors continue to seek good risk-adjusted yield in a low interest rate environment. That said, the stock should get downward support around the 50-day moving average ($28.19), and we think that investors should consider buying MO on any dips.
Kinder Morgan Energy Partners (KMP) has been in a very strong uptrend since breaking out in mid-October. While we think that this up trend will continue, the stock is technically overbought right now. That said, we would be a buyer on any meaningful pullback. The 50-day moving average ($79.19) should provide near-term support and we think that the $78.00-$80.00 range would be a good entry point in the stock.
Disclosure: I am long ABT, MO, NLY, T, KMP, SO.
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