Low Risk Investment Stocks

Low risk investment stocks correlate with companies who have strong balance sheets and strong cash flows that can provide steady profits and steady dividends. Finding these stocks can be done through several good stock services providing individual selections, mutual funds and exchange traded funds.

Characteristics

Quality low risk stocks have certain characteristics that can be recognized by their balance sheet. Quality stocks offer high cash to short term asset ratios, low price earnings ratios, a low ratio of debt to asset and cash flow to cover debt of at least 1.3 to one. In addition, low risk stocks pay dividends and have a history of dividend increases. Low risk stocks are also large capitalization stocks, having market caps (the number of shares times the stock price) in excess of $10 billion dollars.

How to Find Low Risk Stocks

There are several excellent sources of independent research available for finding low risk stocks. Most online brokerages uses third party research such as Standard and Poor's or Moody's Investment Survey. Most libraries have subscriptions to the Value Line Investment Survey. These services provide computer ranking of most stocks on the New York, American and NASDAQ exchanges. In addition, they provide historical records of all the important components used to evaluate and find quality stocks.

Using Exchange Traded Funds

Exchange traded funds are a low cost way to buy indexes of different stocks. The Dow Jones Industrial Average (DIA), the Standard and Poor 500 (SPY) and the NASDAQ 100 (QQQQ) can all be purchased on a weighted (based on capitalization) basis. These indexes are easy ways for an investor to purchase stocks that are low risk, have strong historical track records and provide immediate diversification.

Mutual Fund Investing

Actively managed portfolios such as mutual fund portfolios allow investors to own stocks that are actively managed and represent not only large capitalization but small and mid-sized caps. There are literally thousands of such funds and most are tracked by Morningside (available at most libraries). For a management fee of one percent and an expense ratio of less than one percent, no-load mutual funds are the cheapest way to attract invest in a wide range of low cost, low risk funds. Read the prospectus to understand the stock selection process the fund manager uses.

Low Risk but Dangerous Market

No matter how high the quality of any individual stock, the market itself will gyrate and cause even low risk stocks to stumble. What allows a low risk stock to have less volatility is its dividend yield. In times of turmoil, stocks with a safe dividend (equal to or greater than 10 year United States Treasury bonds) will experience more stability than the market averages because investors (like mutual funds) will buy the stock for its yield. In turn, investors will shun low or no paying dividend stocks. The margin of safety provided by a dividend is twofold: it provides the investor with a steady stream of cash and it lowers the volatility of the stock.

References

• Morningstar (subscription)
• Value Line Investment Survey (subscription)
• Standard and Poor Equity Research (subscription)

Resources

• ETF Explanation
• Moody's Investment Service