Volatility Will Rise, Avoid It With These Stocks

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

“Slower growth suggests that market volatility will rise,” says BlackRock's Chief Investment Strategist Russ Koesterich. Despite that, he suggests buying stocks. To avoid the inherent risk in stocks, look for low-beta necessity stocks like American Water Works (NYSE: AWK), Aqua America (NYSE: WTR), and American States Water (NYSE: AWR).

What's an investor to do?

The stock market is hovering around all time highs. Bond yields are hovering around all time lows. The economy is stuck in neutral. BlackRock expects volatility to kick higher, but believes the risks in bonds outweigh the risks in stocks. But stocks are far from risk free investments. What's an investor to do?

One way to sidestep market volatility is to focus on low beta stocks. Beta is a measure of volatility relative to the broader market. A beta of 1 suggests that a stock will move in lock-step with the market. A beta below one means that the stock is expected to move less than the market.

Doing more

Low beta alone, however, isn't the only way to keep out of risk's way. You can also buy stocks that sell necessities. One of the best options here are low beta food stocks. However, you can go one step further on the necessity scale and buy companies that sell water. You can live for weeks without food, but only a few days without water!

The big fish

The largest public water company is American Water Works. It has a $7 billion market cap and provides water and waste water services to 1,500 communities. Its largest operations are in New Jersey, Pennsylvania, Missouri, Illinois, and Indiana. The company benefits from economies of scale and diversification.

American Water Works was bought by a foreign investor and then spun off in a series of transactions that ended in 2009. In the three years since being fully divested, the top line has headed roughly higher. The bottom line, meanwhile, has advanced each year. Dividends have been increased regularly and are a corporate focus.

With a beta about half that of the market and a product that we all need, American Water Works' business and stock look like good ways to avoid market and economic volatility. The yield of around 2.80% is low in the utility world, but not unusual in the water utility space.

Consistent dividend growth

Aqua America has around $4 billion in market cap. It serves 3 million people in 10 states. However, Pennsylvania accounts for about 55% of the company's top line.

Like its competitors, Aqua has grown steadily through the years via acquisitions. However, of late, it has been looking to rationalize its portfolio to focus on the areas in which it has economies of scale. As such, it sold operations in Maine and New York and bought operations in Ohio in 2012. It is looking to get out of Florida and Georgia.

Such transactions can lead to a little variability on the top and bottom lines, but are good for the company's long-term prospects. Still, the company's revenue and earnings have headed roughly higher for a decade. One area, however, that hasn't changed much is the dividend. The company keeps increasing it on an annual basis.

A beta of less than 0.5 and a steadily increasing dividend should provide solid comfort in volatile markets. The yield of around 2.40% isn't all that exciting, but isn't outlandishly low compared to its peers.

A little fish

American States Water is the smallest company here with a market cap of just about $1 billion. The company's business is more concentrated geographically, serving 75 communities in ten California counties. However, it is more diversified in that the company also distributes electricity (about 8% of the top line). And, like some competitors, it has a division that provides water services to military bases (about 27% of the top line).

The company is pretty small, with the water and electric divisions growing slowly over time. However, the services arm has been a key growth driver, increasing its revenue from $72 million in 2010 to $124 million last year. This growth led to a 15% dividend hike last year and the late May announcement of a 14% increase. The company brags of over 50 years worth of dividend hikes. Not bad for a tiny company tightly focused on California.

With a beta of less than 0.5 and a yield of around 3%, this might be the best option of the trio for income investors.

Utility sell off

Water utilities have sold off with the broader utility sector. That however, make now a great time to jump aboard these relatively boring stocks. Yield seekers won't find them compelling, but those in search of stable businesses with products that are vital necessities couldn't find a better collection of stocks to consider.

With the U.S. relying on the rest of the world for such a large percentage of our goods, many investors are ready for the end of the "made in China" era. Well, it may be here. Read all about the biggest industry disrupters since the personal computer in 3 Stocks to Own for the New Industrial Revolution. Just click here to learn more.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Aqua America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus