5 Income Stocks That Defy Volatility

12/01/2011 8:00 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Got volatility? The stock market sure has. But these picks should be able to hold up nicely, writes Charles Carlson of DRIP Investor.

In my nearly 30 years in the investing business, I haven’t seen the types of daily and weekly market swings that we have seen in the last four months or so.

Many reasons exist for the increase in volatility:

Uncertain times across the globe. Regime changes, foreign debt concerns, citizen uprisings, inflation fears in emerging markets, and economic stagnation in a number of countries in Europe have increased the negative news flow in recent months, driving daily volatility.

Economic uncertainties in the US. Economic data seems to have taken on a Dr. Jekyll/Mr. Hyde persona, with decent economic data one month followed by lousy economic data the next. The lack of a clear trend foments the type of big up and down swings we have seen in stocks in recent months.

The stalemate in Washington and the fiery rhetoric coming from both parties.The sharp ideological divide and rhetorical war between the two political parties have created a crisis of confidence in our political institutions. This crisis in confidence toward Washington has spilled over toward other institutions, not the least of which is Wall Street. The result has been investors withdrawing from the stock market.

New investment vehicles that make it easy to buy and sell baskets of stocks.The advent of exchange traded funds and other investment vehicles makes it easy for investors to move huge amounts of money in nanoseconds, accelerating the trading activity and volatility.

Long memories. No investor wants to live through another 2008. Thus, at the first sign of downward action in the market, investors head for the exits, exacerbating the down days.

Interestingly, volatility is not always a bad thing, especially for long-term investors. Indeed, short-term swings, driven by short-term mindsets and short-term news events, tend to impact all stocks, including good ones. Thus, investors who have the fortitude to take advantage of declines will oftentimes make out quite well over time.

Unfortunately, most investors won’t take advantage of market volatility. In fact, they tend to panic during volatile markets and become emotional and reactive, which can lead to bad decision-making.

To help investors cope with volatile markets, one approach is to focus on investments that typically display lower risk (and, hence, lower volatility). Such investments are “easier holds” during volatile markets. But how do you pinpoint low-risk, low-volatility investments?

My firm has developed a scoring system to assess a stock’s risk level. Scores are based on five statistics related to stock returns over the last 60 months:

  • Bull-market performance (performance in months the S&P 500 Index gains 3%).
  • Bear-market performance (performance in months the S&P 500 Index drops 3%).
  • Standard deviation (a risk measure that looks at variability and dispersion of returns from the average).
  • Beta (a measure of a stock’s volatility in comparison to a market benchmark).
  • A stock’s worst three-month performance.

 Also, all the stocks must have dividend yields of at least 1.9%, and all must offer direct-purchase plans whereby any investor can buy the first share and every share of stock directly.

Among the stocks I especially like in this market environment are Intel (INTC) and Microsoft (MSFT).

Both stocks have held up nicely during the market’s volatility in the last four months. Both stocks are reasonably valued based on modest P-E ratios. And both have outstanding financial positions. Investors in both companies get paid nicely in the form of healthy dividend yields, and I suspect both stocks will outperform the broad market over the next 12 months.

Another sector worth exploring given its combination of yield and safety is the utility group. A number of quality utility stocks are represented in the table, including Alliant Energy (LNT), American Electric Power (AEP), and PPL (PPL). All of these stocks offer direct-purchase plans for initial investment, and are worthwhile investments in the utility sector.

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