Sure, everyone wants stocks with outsized fundamentals and forecasts, but sometimes the best stocks to buy have more modest expectations. After all, the point of building a portfolio is to generate superior risk-adjusted returns. Anyone can swing for the fences with a concentrated portfolio of the hottest names, but those investors are also much more likely to strike.
That’s why it pays to pad your holding with companies that offer a rare combination of growth, dividends and stability. These stocks aren’t intended to drive the majority of returns. Rather, they’re role players, chipping in above-average growth while also adding ballast against market turmoil.
Bench-player stocks can be found in a wide range of sectors. They also can be some of the more improbable bets you can think of.
To find triple threat stocks to buy for a supporting role in a portfolio, we looked for names with a superior growth forecast to the S&P 500, as well as above-average dividend yields. (The broader market has a long-term growth forecast of 7% a year and dividend yield of 2%.)
Lastly, to add some stability, we looked for stocks with beta coefficients of less than 1, which typically implies that a stock is less volatile than the broader market. Although it will tend to lag when the market is rising, it also will hold up better when everything is selling off.
True, these are some pretty boring stocks to buy, but the combination of better-than-average growth and healthy payouts should drive market-beating total returns over the longer haul. They also should help you sleep better at night.
Read on for these six triple threat stocks to buy:
Stocks to Buy: Arthur J Gallagher & Co. (AJG)
AJG Dividend Yield: 3.1%
Five-Year Annual Growth Forecast: 9%
Beta: 0.94
Arthur J Gallagher & Co. (AJG) is an under-the-radar stock with a low P/E getting a lot of love from Wall Street. Indeed, of the 20 analysts covering the stock, 14 call it a “buy.” (Four “holds” and two “sells” round out the coverage.)
That’s partly because this insurance brokerage is significantly cheaper than the broader market, despite having a higher growth forecast, and it has a consistent history of cash-flow growth.
But the more proximate cause of the Street’s enthusiasm is that AJG is on an acquisition tear. Indeed, between purchases and equity investments, Arthur has made more than 15 deals this year alone. The strategy is paying off, as AJG beat the Street’s Q2 earnings and sales forecasts late Tuesday.
The addition of so many insurance brokerages and consulting firms is expected to drive double-digit-percent growth in 2015 when the rest of the market is struggling to stay positive.
Stocks to Buy: Darden Restaurants (DRI)
DRI Dividend Yield: 3%
Five-Year Annual Growth Forecast: 14%
Beta: 0.6
Darden Restaurants (DRI) looks like an entirely different stock ever since it sold the Red Lobster chain to focus on Olive Garden and its other brands.
Shares were range-bound for years before DRI restructured. Now the stock is up 55% over the last 52 weeks.
True, DRI is trading at a premium to its five-year average price-to-earnings ratio, but then the last five years included the anchor that was Red Lobster. With a fresh start, DRI deserves a higher multiple, especially with a growth rate double that of the S&P 500.
A low beta and stable dividend history add to DRI’s appeal. No, this name isn’t going to blast off in a bull market, but neither will it underperform when stocks are in a downtrend.
Furthermore, DRI has raised its annual dividend every year for a decade now.
Stocks to Buy: GameStop (GME)
GME Dividend Yield: 3.2%
Five-Year Annual Growth Forecast: 13%
Beta: 0.87
GameStop (GME) was supposed to be the next Blockbuster — just another a retailer laid low by the digital delivery of its main product. Indeed, short-sellers have flooded into GME to bet on that outcome.
But somewhere along the line, the video game seller didn’t get the message. Revenue growth is sluggish, but it’s not in decline. Heck, annual sales fell only one time in the past 10 years.
It turns out that GME customers are more loyal than anyone was expecting, largely because of the company’s trade-in program. But the bull case doesn’t end there.
Since revenue growth has peaked, GME has decided to use its enormous cash-flow to lavish dividends and share buybacks on investors. It’s a strategy that appears to be working. The stock is up more than 30% YTD, helped in part by short covering.
Stocks to Buy: Maxim Integrated Products (MXIM)
MXIM Dividend Yield: 3.6%
Five-Year Annual Growth Forecast: 10%
Beta: 0.93
Maxim Integrated Products (MXIM) isn’t as well known as some other chip makers, but even while operating in a highly cyclical industry, MXIM has managed to be a remarkably steady total return engine.
That’s partly due to a highly diversified business. MXIM makes chips for smartphones, cars, data centers and industrial applications, among other end markets. Although MXIM never shows much top-line life, expense control and a big dividend have kept shares on the market’s good side.
Over the last five years, MXIM has generated an annualized total return of 17%. That beats the broader market by about 3 percentage points over the same span.
A reasonable valuation — MXIM is cheaper than the S&P 500 even as it has a better growth forecast — and a generous dividend help make a compelling case for the chipmaker’s stock.
Stocks to Buy: Reynolds American (RAI)
RAI Dividend Yield: 3.4%
Five-Year Annual Growth Forecast: 13%
Beta: 0.65
As a tobacco company, you don’t expect Reynolds American (RAI) to have an above-average growth forecast, but as quarterly results just showed, a recent acquisition is set to become a big boost.
RAI closed its purchase of Lorillard only last month, and the crown jewel of the Newport Brand helped the company enjoy a beat-and-raise quarterly report. The sad reality is that as bad as smoking may be, RAI is still able to benefit from price and volume gains.
Indeed, the market is so excited with RAI’s prospects, it has sent shares up 27% this year alone.
Other pluses include low volatility and an ample dividend that investors can rely on. RAI has paid uninterrupted dividends since 1999 and has raised them annually for the past 10 years.
Stocks to Buy: Scotts Miracle-Gro Company (SMG)
SMG Dividend Yield: 3%
Five-Year Annual Growth Forecast: 10%
Beta: 0.94
Scotts Miracle-Gro (SMG) stock has been struggling ever since it missed quarterly estimates in May, but with a solid long-term growth forecast, reasonable P/E and above-average dividend, SMG looks like a stable, if boring, holding.
A unusually long winter got SMG off to a weak start this year, but since then it has seen a surge in mass-market retail customers.
By forward P/E, SMG is cheaper than the broader market, despite having a higher growth forecast. It’s also less expensive than its own long-term average, according to Thomson Reuters Stock Reports.
In addition to that reasonably attractive valuation, Scotts is traditionally less volatile than the S&P 500, and pays a healthy dividend. Indeed, SMG has hiked its dividend every year since 2009.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
