Investors have been shifting out of investments that protect against rare, but catastrophic risks. With the market near all time highs, those risks are still very real. Investing in low beta stocks like The Coca-Cola Company (NYSE:KO), PepsiCo, Inc. (NYSE:PEP), AT&T Inc. (NYSE:T), and Verizon Communications Inc. (NYSE:VZ) can help protect against some of that downside.
Black Swans
Reuters recently published an article highlighting that hedge funds designed to protect investors from large, unexpected losses are seeing money flow out their doors. While these black swan funds were popular after the 2007 to 2009 recession and associated market crash, it seems Wall Street’s collective short memory is leading investors to jump back into the market with abandon.
However, some market watchers, including mutual fund manager John Hussman, continue to warn that markets are overstretched. Hussman’s data driven analysis recently led him to pen: “…stocks are not cheap, but are instead strenuously overvalued. The speculative reach for yield, encouraged by the Federal Reserve, has created another bubble – which is not recognized as a bubble only because distorted profit margins create the illusion that stocks are reasonably valued.”
Beta
There’s no way to avoid steep market drops except to be out of the market. Only, income investors can’t live off of their dividends if they aren’t invested. One way to soften the blow is to focus on low beta dividend payers. Beta is a measure of sensitivity to the broader market. A beta of one suggests that a stock will move in lockstep, up and down, with the overall market.
A beta below one means that a stock is likely to move less than the market. Here are four large companies with betas below 0.5:
Coca-Cola and PepsiCo
Coke is highly focused on its beverages. However, Coke is easily the number one cola brand in the world. It has a moderate level of debt and a reasonable payout ratio. The Coca-Cola Company (NYSE:KO) boasts operations in more than 200 countries, some 3,500 products, and a massive distribution network. There’s a reason why Coke is the soda industry’s leader.
PepsiCo, Inc. (NYSE:PEP) is the number two player in the beverage space, but is number one in snacks. For investors seeking out a more diversified business, Pepsi is the better option. Not only is Pepsi a leader in snacks, via its Frito-Lay division, but it also has a large food business that it acquired when it bought Quaker Oats. So, in reality, it has three different avenues of growth. It’s more heavily indebted than The Coca-Cola Company (NYSE:KO) and has a similar payout ratio. That said, the small frequently purchased items Pepsi sells should easily support the more material debt load.
Both companies are set to benefit as emerging economies industrialize. While soda consumption in mature markets is fairly stable, lesser developed countries have plenty of room for increased consumption. More servings means more money flowing down to the bottom line. PepsiCo, Inc. (NYSE:PEP)’s snacks and foods will also benefit from this trend.
Both are solid companies with slow but relatively predictable growth ahead of them. Investors would do well to consider either, or both.
AT&T and Verizon
AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) basically have a duopoly in the U.S. cell phone space. That’s been an enviable position to be in as consumers have embraced cell phones. The big adoption push is over, however. That’s good news since both companies have established market positions that they aren’t likely to lose anytime soon.
The new thing is increased data usage. Customers are getting more and more accustomed to accessing services “on the go” that use notable bandwidth, such as video and music streaming. This should push up the revenues that both companies earn. However, it will also require increased attention to service quality.
While they aren’t exactly interchangeable, the similarities between AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) are material. That said, AT&T’s recent yield of around 4.7% is more enticing than Verizon’s 4.2%. Both are likely to see slow, but stable top line growth in the years ahead.
Note that AT&T has a long history of regular annual dividend increases, while Verizon’s history is a bit more spotty. With betas well less than half of the market’s, either would be a good option to reduce overall risk. That said, those looking for a consistent dividend policy should favor AT&T Inc. (NYSE:T).
Long Tails
These four companies are all industry leaders with great businesses. Investors who want to be in the market, but still protect themselves on the downside, should carefully consider each one.
The article How To Invest Despite Long-Tail Risk Part 1 originally appeared on Fool.com and is written by Reuben Brewer.
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