Investors Can Have it All

By Jonathan Yates - July 11, 2012 | Tickers: MO, SAI, WM | 0 Comments

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One of the first equations that investors learn is the risk/reward ratio.  An asset that entails a higher risk will offer a higher reward: junk bonds have higher interest rates than United States Treasury bonds, as an example.  But that has been proven not to be true for all stocks according to the article "How to Pick Stocks without Getting Burned," by Carolyn Bigda and Susie Poppick, in the June 2012 issue of Money magazine.  The piece reported on research from Dr. Robert Haugen of Haugen Financial Systems that "...found that between 1990 and 2011, the steadiest U.S. shares produced the highest returns while the most volatile domestic shares lost value."

This only makes sense.  Dividend paying stocks that perform well such as Waste Management (NYSE: WM), SAIC, INC (NYSE: SAI) and Altria Group (NYSE: MO) will be less volatile for the simple reason there is little reason for an investor, whether an individual or an institution, to sell the shares.  The dividend incomes alone should keep investors holding the stocks for long term gains, particularly in today's low interest rate environment combined with weak total returns.

The average stock on the Standard & Poor's 500 Index pays a dividend of around 2%. Altria Group, which manufactures and sells cigarettes and wine, provides its shareholders with a dividend income at the rate of 4.69%.  The beta of Altria Group is very low at just 0.40, less than half of the 1 for the stock market as a whole.  Contributing to the low beta is the high level of institutional ownership at almost 60%.  Institutional investors such as mutual funds and pension groups generally buy for the long term, which reduces the volatility of their holdings.  It is a bullish indicator when an institutional investor buys as these firms have deep research resources and are highly sought after by publicly traded companies and other entities.  

Waste Management has a dividend yield of 4.30% and a beta of just 0.55.  Based in Houston, the company provides waste disposal services to residential, commercial, industrial, and municipal customers in the United States and Canada.  That is a recession proof business, which obviously results in a stable stock price...and a low beta.  Institutional ownership is over 80% for Waste Management.

SAIC, Inc is a government contractor headquartered in the Washington, DC area in McLean, Virgina.  This too is a business that rarely suffers from downturns.  The dividend from SAIC, Inc comes at a 4.13% yield for its shareholders.  More than 50% of the shares of SAIC, Inc are held by institutional investors.  Due to the stability of its business model, the beta is only 0.39.

In addition to a high dividend and a low beta, these stocks share another very attractive feature: very bullish trends in the projected price-to-earnings ratio for each.   Waste Management has a price-to-earnings ratio of 16.34, which is estimated to improve to 13.31.  For Altria Group, the price-to-earnings ratio is expected to fall to 14.82.  The projected price-to-earnings ratio for SAIC, Inc. is just 8.61.

It is the solid earnings with growth in the future that, after all, provide for the capital gains and dividend income of an equity.  When the price-to-earnings ratio is projected to improve, there is certainly no reason to sell a stock with an above average dividend income stream.  All of that directly factors into the low beta rating for each company.  It also explains why low beta stocks such as Altria Group, Waste Management and SAIC can be expected to perform better over time and offer a greater total return, particularly with a high dividend yield.

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