How to Pick Conservative Stocks

For investors who want to engage in individual stock picking, a good starting point is to look for some quality conservative stocks to build a stable portfolio.  There are plenty of ways to define conservative stock picking, and many different strategies that have evolved over time.  For an introduction to the topic, here are a few ideas about how to pick conservative stocks.

One method would be to stick with the mainstays of industry by buying into companies that are well established, have market capitalization measured in the billions, and are leaders in their sectors of the economy.  One good place to start looking for such stocks would be the individual components of the Dow Jones averages.  The Dow Jones Industrial Average, Dow Jones Transportation Average, and Dow Jones Utilities Average are all stock indexes that track major industry-leading companies.  The editors of Dow Jones do not simply include (or remove) any company in those indexes on a whim.  Many people may fault one index or another for being overly representative of particular industries or sectors, but on the whole it is hard to argue that any one of those companies is not a major company with decades of strong growth behind it.  Of course, that does not mean there is no risk.  As recently as 2005, the Dow Jones Industrial Average contained General Motors and AIG.  So buying Dow components may be conservative, but it is not risk free.

A second method would be to find stocks with a strong history of paying dividends or a high dividend yield.  When a company makes a strong profit, it can do one of three things: pay off debt, accumulate cash, or pay the money to the stock holders in the form of dividends.  Although there are now many companies that do not pay dividends (instead investing all their profits in growing the company) the payment of dividends has historically been one of the main purposes of buying stock in companies.  The dividend yield is the ratio between the annual dividend payment and the current price, and is expressed as a percentage.  A stock trading at $100 per share which pays an annual dividend of $5 per share is trading at a 5% dividend yield.  Some stock pickers combine the first two methods of finding conservative stocks to form their entire investment strategy: they buy stock in the components of the Dow industrial average that are trading at the highest dividend yield.

A third method for picking conservative stocks is to use a term called the Beta ratio.  Beta is a mathematical calculation to assess how volatile a stock’s price is relative to the rest of the market.  Volatility is a term for how wildly a stock price will swing.  The entire stock market has a Beta value of 1.  If a stock has a Beta value of more than 1, it will increase and decrease with more volatility than the stock market.  If the Beta is less than 1, it will have price fluctuations that are more subdued than the stock market as a whole.  By picking stocks with a low Beta number, a conservative bundle of stocks can be bought up that should avoid some of the more gut-wrenching up and down days when stocks soar and plummet.

None of these methods of stock picking are without risk, and you can count on some investments to lose money.  But for picking conservative stocks, looking for industry giants, focusing on dividend yields, and checking the stock’s Beta ratio provide three methods for finding some conservative picks to fill out your portfolio.