Let’s face it: volatility is an unavoidable feature of the stock market. Even the most stable companies will experience price movements from time to time. Unless you put your money in a GIC (or a savings account), no investment can ever guarantee to return the money you invest, no matter how profitable the company seems.
That said, some stocks are far more stable than others. We call these “safe and low volatility stocks.” Below, we’ll discuss some examples of safe stocks, as well as how you can pick them out on your own.
What are safe and low volatility stocks?
Safe and low volatility stocks are those stocks who have a relatively stable annual rate of return. That’s not to say the annual rate of return is high, nor is it to say it’s low. It’s only to say that, when compared with other stocks, safe stocks are more predictable.
For example, let’s say we have two stocks, Stock A and Stock B. Over a five year period, here’s what the average annual rate of return looks like for these two stocks:
Year 1: 16.5%
Year 2: 4.7%
Year 3: 19.4%
Year 4: – 6.8%
Year 5: 11.1%
Average annual rate of return: 8.98%
Year 1: 6.2%
Year 2: 5.9%
Year 3: 5.4%
Year 4: 4.5%
Year 5: 5.7%
Average annual rate of return: 5.54%
As you can see, Stock A has a higher average annual rate of return (8.98%), but its volatility is also greater. In Year 3, for instance, Stock A makes an extraordinary leap to 19.4%, but then in Year 4, it performs poorly, coming out with negative returns.
In contrast, Stock B may have a lower average annual rate of return, but its rate is more predictable. Based on this small sample, we can expect Stock B to average around 5% to 6% each year, and we would most likely call Stock B a safe stock.
Another way of looking at volatility is to analyze a stock’s beta, which is a number given to a stock to measure its risk. Typically, the market has a beta of 1.0, with numbers above 1.0 being more risky and numbers below 1.0 more safe. If a stock has a beta of, say, 0.33, you know it’s probably less volatile than a stock that has a beta of 1.54.
What are some examples of safe and low volatility stocks?
Again, while all stocks experience volatility, some are more resistant to price movements. Here are just five Canadian stocks that could deliver consistent returns over a long period of time.
The utility stock Fortis (TSX:FTS)(NYSE:FTS) has perhaps one of the lowest betas on the market, right now at an ultra low of .08. This gives Fortis stability from massive movements in the market, which could protect your investment from downside risks. What’s even better is that Fortis has a solid dividend: for 48 years in a row, Fortis has increased its dividend, which sits at around 3.67% right now.
BCE (TSX:BCE)(NYSE:BCE) is one of Canada’s top three telecommunication companies. It has a recurring source of income—clients who need digital services—which is one reason BCE has a low beta of .33. With the demand for digital services growing, from remote work to digital learning, BCE is less vulnerable to severe market volatility, andi it has a hefty dividend, too.
Bank of Nova Scotia
As the third largest bank in Canada, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) has a low beta (.83) and a hefty dividend yield. Given that the banking industry is highly regulated, which makes it hard for small banks to displace bigger ones, Bank of Nova Scotia enjoys unquestioned stability. That makes it an attractive stock for investors who don’t like volatility, as it’s unlikely this stock will see enormous price movements.
Like most low volatility stocks, Waste Connections (TSX:WCN)(NYSE:WCN) provides an essential service: to collect, transfer, and dispose of non-hazardous waste. The company enjoys a low beta (.73), and it has increased its dividends by double digits over the last eleven years.
NorthWest Healthcare Properties REIT
NorthWest Healthcare Properties REIT (TSX:NWH.UN) owns and operates 192 healthcare properties with 2,000 tenants across seven countries (Canada, the UK, Australia, New Zealand, Brazil, the Netherlands, and Germany). It, too, has a low beta (.79), and its stable sources of income, not to mention the long-term contracts on its tenants, protect this stock from greater volatility.
How to find safe and low volatility stocks?
Perhaps the best way to spot low volatility stocks is to look for companies with steady and growing revenues. When a company’s revenue is erratic, when one quarter it seems poised for growth and the next it’s taking losses, it’s stock is typically more volatile. Along these lines you could also examine a company’s dividend history, particularly during tough economic times, such as the COVID-19 pandemic. When a company rarely cuts its dividend, even when the economy is bad, that’s a great sign it’s a safe stock.
Safe stocks are also less affected by cyclicality. Cyclicality describes a company’s sensitivity to market cycles. In a healthy market, the economy goes through periods of expansion followed (or preceded) by periods of recession. Many stocks, such as those in the consumer discretionary sector, are heavily impacted by these cycles (in times of recession people are less likely to have disposable income). Other stocks, such as those in the financial and utilities sectors are less impacted during recessions, since consumers have to buy them no matter the status of the overall economy. That makes the stocks less volatile and safer for investors.
Finally, safe and low volatile stocks typically have competitive advantages over similar stocks. They may have a strong brand, for instance, one that every household recognizes, or they could have a cost-efficient production line. Whatever their competitive advantage, they are unlikely to go away, which makes their stocks reliable over the long-term.
Get started investing with safe stocks
As noted above, no stock is immune to market volatility. Even safe stocks will take a hit from time to time. What makes safe stocks more reliable than other stocks, however, is their resilience: no matter what happens to the overall economy, these stocks are typically the least affected.
Of course, even with safe stocks, you should still aim to diversify your stock portfolio. Though safe stocks are less volatile than growth stocks, some safe stocks are less volatile than others. Spread your money across numerous safe stocks, and you’ll build a stronger safety net than if you invest in one or two.
For beginning investors, safe and low volatility stocks could be a less risky way to start investing in the stock market. If that sounds right to you, then start by looking for stable companies, buy stock through one of Canada’s best online brokerages, and hold your stock for the long-run.