Safe Stocks to Buy: Investing in Low Volatility Stocks

Let’s face it: volatility is an unavoidable feature of the stock market. Even the most stable companies will experience price movements from time to time. Unless you put your money in a GIC (or a savings account), no investment can ever guarantee to return the money you invest, no matter how profitable the company seems. 

That said, some stocks are far more stable than others. We call these “safe and low volatility stocks.” Below, we’ll discuss some examples of safe stocks, as well as how you can pick them out on your own. 

What are safe and low volatility stocks? 

Safe and low volatility stocks are those stocks who have a relatively stable annual rate of return. That’s not to say the annual rate of return is high, nor is it to say it’s low. It’s only to say that, when compared with other stocks, safe stocks are more predictable. 

For example, let’s say we have two stocks, Stock A and Stock B. Over a five year period, here’s what the average annual rate of return looks like for these two stocks: 

As you can see, Stock A has a higher average annual rate of return (8.98%), but its volatility is also greater. In Year 3, for instance, Stock A makes an extraordinary leap to 19.4%, but then in Year 4, it performs poorly, coming out with negative returns. 

In contrast, Stock B may have a lower average annual rate of return, but its rate is more predictable. Based on this small sample, we can expect Stock B to average around 5% to 6% each year, and we would most likely call Stock B a safe stock. 

Another way of looking at volatility is to analyze a stock’s beta, which is a number given to a stock to measure its risk. Typically, the market has a beta of 1.0, with numbers above 1.0 being more risky and numbers below 1.0 more safe. If a stock has a beta of, say, 0.33, you know it’s probably less volatile than a stock that has a beta of 1.54. 

The Benefits of Low Volatility Stocks

1. Reduced Risk: As the name suggests, low volatility stocks tend to exhibit less dramatic price swings, reducing the overall risk in an investment portfolio. While no investment is risk-free, these stocks can offer relative stability compared to more volatile alternatives.
2. Consistent Returns: Low volatility stocks often deliver consistent returns over the long term. Their performance may not be as explosive as high-growth stocks, but they provide dependable dividends and price appreciation.
3. Peace of Mind: For conservative investors or those relying on their investments for retirement, low volatility stocks offer peace of mind. Knowing that your investment is less likely to experience extreme declines can help you sleep better at night.
4. Resilience in Economic Downturns: Companies behind low volatility stocks usually have strong business fundamentals, allowing them to weather economic downturns more effectively. Their products or services often remain in demand even during tough times, contributing to stability.

What are some examples of safe stocks to invest in? 

Again, while all stocks experience volatility, some are more resistant to price movements. Here are just five Canadian safe stocks that could deliver consistent returns over a long period of time. 

Fortis 

The utility stock Fortis (TSX:FTS) has perhaps one of the lowest betas on the market, right now at an ultra low of .08. This gives Fortis stability from massive movements in the market, which could protect your investment from downside risks. What’s even better is that Fortis has a solid dividend: for 48 years in a row, Fortis has increased its dividend, which sits at around 3.67% right now. 

BCE 

BCE (TSX:BCE) is one of Canada’s top three telecommunication companies. It has a recurring source of income—clients who need digital services—which is one reason BCE has a low beta of .33. With the demand for digital services growing, from remote work to digital learning, BCE is less vulnerable to severe market volatility, andi it has a hefty dividend, too. 

Bank of Nova Scotia 

As the third largest bank in Canada, Bank of Nova Scotia (TSX:BNS) has a low beta (.83) and a hefty dividend yield. Given that the banking industry is highly regulated, which makes it hard for small banks to displace bigger ones, Bank of Nova Scotia enjoys unquestioned stability. That makes it an attractive stock for investors who don’t like volatility, as it’s unlikely this stock will see enormous price movements.  

Waste Connections 

Like most low volatility stocks, Waste Connections (TSX:WCN) provides an essential service: to collect, transfer, and dispose of non-hazardous waste. The company enjoys a low beta (.73), and it has increased its dividends by double digits over the last eleven years. 

NorthWest Healthcare Properties REIT

NorthWest Healthcare Properties REIT (TSX:NWH.UN) owns and operates 192 healthcare properties with 2,000 tenants across seven countries (Canada, the UK, Australia, New Zealand, Brazil, the Netherlands, and Germany). It, too, has a low beta (.79), and its stable sources of income, not to mention the long-term contracts on its tenants, protect this stock from greater volatility. 

RELATED: Investing in REITS: Top Canadian REITS 

4 ways to identify safe stocks to invest in

Here are four characteristics of safe stocks to keep an eye out for when picking which stocks to invest in.

1. Steady revenue

The foundation of a stable stock often lies in the company’s ability to generate consistent and growing revenue. Companies that demonstrate reliable revenue streams are generally more capable of navigating economic uncertainties and market fluctuations.

• Market Positioning: These firms are usually well-positioned in their respective markets, often holding significant market share that serves as a buffer against competitors.
• Predictability: Steady revenues indicate predictability in a company’s business model. This predictability reassures investors that the business can sustain operations and meets its financial commitments, even when faced with economic headwinds.
• Operational Efficiency: Companies with consistent revenue often have efficient operations and a deep understanding of their market, allowing them to adapt to changes without experiencing significant financial setbacks.

2. Continues to pay dividends

Dividends are a tangible sign of a company’s financial health and management’s commitment to returning value to shareholders. Companies that consistently pay—and potentially increase—dividends during economic downturns illustrate resilience and financial strength.

• Total Returns: Dividends contribute significantly to a stock’s total return, enhancing its appeal to long-term investors seeking regular income in addition to capital appreciation.
• Dividend History: Examining a company’s dividend history provides insights into its cash flow management and operational stability. A continuous or growing dividend payout, especially during tough times like the COVID-19 pandemic, suggests robust underlying business fundamentals.
• Investor Trust: Dividend payments convey management’s confidence in the company’s long-term profitability and health, fostering investor trust.

3. Not in a cyclical market

Cyclical stocks are those that typically perform well during periods of economic growth but suffer during downturns. These include industries such as travel, automotive, luxury goods, and most notably, the consumer discretionary sector. When economic conditions tighten, consumers tend to cut back on non-essential spending, directly impacting the revenues—and stock prices—of companies in these sectors.

In contrast, non-cyclical (defensive) stocks are found in sectors that provide essential goods and services regardless of economic conditions. Stocks in non-cyclical sectors are generally more stable and resilient during economic stress, making them attractive to risk-averse investors or those aiming to preserve capital. By avoiding highly cyclical stocks, investors can reduce exposure to sharp downturns and maintain more consistent portfolio performance over time.

Non-cyclical markets include:

• Utilities (electricity, water, gas)
• Healthcare (pharmaceuticals, medical services)
• Consumer staples (food, hygiene products, household essentials)
• Some sectors, such as the financial and utilities market sectors, exhibit moderate cyclicality. While affected by interest rates and credit markets, banks and insurance companies provide core services that support overall economic function, offering relative stability compared to fully cyclical sectors.

Demand for these goods remains consistent even in recessions, making these sectors—and the companies within them—more insulated from market volatility.

4. Competitive advantages over similar brands

A competitive edge ensures a company can maintain its market position and fend off competitors, which is vital for long-term stability and growth.

• Barriers to Entry: High barriers to entry protect established companies from new competitors. These might include proprietary technology, significant capital requirements, or regulatory protections.
• Strong Brand Recognition: A recognizable and trusted brand often commands customer loyalty, enabling consistent sales even in competitive markets. Companies like Coca-Cola or Apple illustrate the power of brand strength in maintaining market authority.
• Cost Efficiency and Innovation: Companies with leading-edge technologies, effective supply chains, or cost-effective operations can deliver products at lower prices or higher margins than competitors, securing sustained competitive advantages.

Should I invest in safe stocks?

As noted above, no stock is immune to market volatility. Even safe stocks will take a hit from time to time. What makes safe stocks more reliable than other stocks, however, is their resilience: no matter what happens to the overall economy, these stocks are typically the least affected. 

Of course, even with safe stocks, you should still aim to diversify your stock portfolio. Though safe stocks are less volatile than growth stocks, some safe stocks are less volatile than others. Spread your money across numerous safe stocks, and you’ll build a stronger safety net than if you invest in one or two. 

For beginner investors, safe and low volatility stocks could be a less risky way to start investing in the stock market.

If that sounds right to you, then start by looking for stable companies, buy stock through one of Canada’s best online brokerages, and hold your stock for the long-run.