Most investors with some basic knowledge know about the P/E ratio. That ratio can tell you how expensive an investment is, especially related to comparable companies. Other ratios, like the dividend payout ratio are also helpful measures. More advanced investors may like to be aware of a company’s beta.
Beta measures the temperament of a stock investment. Is it relatively calm or is it likely to have euphoric highs and moody lows and charge up and down like a psychotic kite on a windy day? Some stocks follow the ups-and-downs of the general market. If the market is diving, the stock with a higher beta probably will too. If the market is charging up into the sky, the stock with the higher beta may as well.
Beta is a measure you can see on most financial web sites that tell you about a stock. If the beta is less than 1, it is probably a less volatile investment. If the beta is greater than one, it probably is more volatile than the market. If the beta is 1, then it probably behaves much like the market. For example, a stock with a beta of 1.2 is about 20% more volatile than the S&P 500. If a stock has a beta of 0.5, it will go up (or down) at about half the pace of the market. That can bring some comfort when there is a lot of volatility in the market.
One investment I own is a technology company with the ticker symbol KLAC. KLAC is more volatile than the general market. If you look at the “Snapshot” for KLAC on the Fidelity Investments web site and scroll down, you will see a section that looks like the following. KLAC has a beta of 1.15%. That means it will be more volatile than the average investment by at least 15%. But notice the EPS growth. I am willing to ride out volatility to invest in a company with earnings growth.
I downloaded the top 100 low-beta stocks from https://www.suredividend.com/low-beta-stocks/ and then looked to see which ones I might own. The next image on this post shows the nineteen we have in our portfolio. It isn’t surprising to see utilities, telecom and retail stocks in this mix.
That’s helpful! That’s for the explanation.