In a perfect world, the best investments simultaneously provide a high reward without putting investor capital at undue risk. Actually finding examples of these low-risk investments is much more difficult. In today's low interest rate environment in particular, the yields on risk-free investments like Treasury notes, savings accounts, or certificates of deposit are simply too low to buy and hold forever.
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What's an investor to do? Start with these five low-risk investments.
Data source: Google Finance, YCharts, and The Wall Street Journal.
Kimberly-Clark (NYSE: KMB) is the corporate owner of many brands well known to households across the world, including Huggies, Kleenex, Kotex, Pull-Ups, and Scott, to name a few. These brands produce essential products for children, the elderly, and nearly everyone in between.
That market positioning has led to annual dividend increases for 44 consecutive years -- clear evidence of the company's safety and staying power. Its current dividend yield is roughly 80 basis points higher than the average of the S&P 500, and its stock price has more than doubled the S&P over the past 12 months.
Thinking longer term, Kimberly-Clark may be better protected from fast-paced technological change, as well. While new technology is disrupting industry after industry, the market for tissues, diapers, and adult care products seems well protected from Silicon Valley.
Of all the stocks on this list, I think Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) is most likely to raise a few eyebrows. At the end of the 2009 trading year, for example, Berkshire's stock had fallen further than any of the other stocks on this list. Volatility was through the roof, and Berkshire's exposure to the financial sector had the market selling with reckless abandon. Even today, Berkshire's beta is the second highest of the stocks included here. (Beta is a commonly used metric to quantify a stock's volatility.)
To me, volatility does not in and of itself mean that a stock is high risk. This is an important concept for investors to understand, particularly when investing for long-term objectives like retirement. Just because a stock's price swings in larger movements than another, that doesn't necessarily imply that there is an increased probability of permanent capital loss over the long term.
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In the case of Berkshire, the company is so large and well-diversified that the probability of significant, permanent capital loss over the long term is low. Berkshire Hathaway's backbone is in the insurance business, but it also has substantial holdings in the energy industry, railroads, materials, consumer goods, housing, and just about everything else under the sun. Berkshire is so big and so diversified that some analysts equate an investment in Berkshire with an investment in the U.S. economy.
So while the market may send a stock like Berkshire wildly higher or lower as the economic cycle oscillates through time, investors can sleep well at night knowing that the company is generating massive operating profits, continuing to make big investments in industries and companies that can last a lifetime, and has a very low risk of permanent loss of capital.
The stock may swing up or down, but over the long term, those swings are likely immaterial to the overall trend from the lower left to the upper right.
American States Water
American States Water (NYSE: AWR) is a water utility primarily serving the California market. Roughly 80% of its revenue comes from providing this basic need to its clients in the state. However, it also provides water to a host of U.S. military bases under contracts that last 50 years. This accounts for the remainder of the company's revenue, and it represents a decent growth opportunity going forward.
The need for water is as fundamental as it gets, making American States Water one of the lowest-risk stock investments available. The company has increased its annual dividend for 62 consecutive years on this demand, and I don't see any reason why that trend won't continue.
Waste Management, Inc
Waste Management, Inc (NYSE: WM) owns and operates landfills. Dealing with trash is not a pretty business, but it can be lucrative when done right, and it comes with big barriers to entry -- a fact that makes Waste Management, Inc a low-risk investment in my book. Getting into the waste business requires overcoming high capital costs and increasingly high regulatory barriers. That keeps competitors out, and it makes existing landfills even more valuable.
Looking toward the future, the company's management team is making smart, shareholder-friendly investments to drive the company and stock forward. For example, the company is transitioning its truck fleet from diesel to natural gas -- a cheaper fuel source in general, but also one that is a natural byproduct of the decomposing waste in the company's landfills. Its dividend is also above the average yield of the S&P 500, and the company has been steadily buying back shares over the past 15 years. Altogether, these factors make Waste Management a low-risk stock that has a place in any portfolio now and in the future.
Most consumers are familiar with 3M (NYSE: MMM) only through its brand of sticky notes, Post-It Notes. However, there is a lot more to this diversified manufacturer than just that. In fact, the company has about 60,000 different products that it sells all over the world.
3M's largest and most important business is providing products to industrial companies around the world. It also has significant businesses in the healthcare, energy, consumer goods, safety, and other industries. From chemicals to hard hats to healthcare information systems to components inside the iPhone, 3M products are everywhere.
The reason 3M products are so common -- and why I think the company will remain so successful -- lies in its commitment to science and research and development. In the second quarter of 2016, for example, 3M invested about 10% of its sales into R&D and capital expenditures. That's a lot of cash, and it is that commitment to innovation that has consistently led to breakthroughs and new products that help customers and the bottom line. I think that's a winning strategy for today and for the future.
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Jay Jenkins has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool owns shares of Waste Management. The Motley Fool recommends Kimberly-Clark. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.