Should I be looking at low beta stocks?

Beta is a measure of a stock's volatility in relation to an index like the S&P 500 or the S&P/TSX Composite Index. A beta of:

• 1.0 indicates that the stock moves in tandem with the index both up and down.
  

• Less than 1.0 indicates the stock is less volatile than the index. It tends to suffer smaller price fluctuations, suffering lower losses during market downturns and benefiting from smaller gains during bull market periods.
  

• Greater than 1.0 indicates higher volatility. Price moves are more extreme than those of most stocks. Gains can be exhilarating but when the inevitable losses occur, taking the hit can be tough.

Can retirees benefit from owning low beta stocks? I believe they can. Low beta stocks tend to have smaller losses during market corrections or bear markets. On the other hand, and this is surprising, studies have shown that low beta stocks can outperform the market over the long term despite their lower volatility. 

This casts doubt on the widely held belief that higher risk is necessary to enjoy higher returns. A back-test of a low-volatility portfolio, rebalanced annually with a maximum of 15 stocks, found that the low-volatility investment strategy followed from February 2007 to February 2018 produced an annualized total return of 12.7%. The S&P/TSX Composite total return index advanced only 4.9% over the same period. 

Clearly, these low beta stocks outperformed their high beta counterparts even though they must have endured both bull and bear markets together. A lot happens in the market over a course of 11 years. Some of the low beta stocks included in the study are the same low beta stocks often found in the portfolios of retirees.

• BCE
• Brookfield Renewable Partners
• Canadian National Railway
  
• Canadian Tire Corporation
  
• Emera
• Fortis
• Great-West Lifeco
  
• Hydro
• Loblaw Companies
  
• Pembina Pipeline

It appears low beta stocks, contrary to accepted dogma, may very well outperform high beta stocks over time and through varying market conditions. And many low beta stocks are issued by long established companies paying very nice dividends. The result is steady income thanks to the dividends plus out-performance and managed risk -- all qualities that are much appreciated in retirement, or anytime if one stops to think about it.

I knew there was a reason I liked Emera. (Just moments after posting this, I read the following on the TSX Internet site: "Emera Announces Increase in Common Dividend, Marking 18 Consecutive Years of Growth."