Modern portfolio theory suggests that one must assume additional risk to achieve outsized returns…But, there is more than enough evidence to show that this doesn’t hold true in practice. In fact, low volatility stocks tend to outperform the rest of the stock market. This can be seen by comparing the performance of the S&P 500 Low Volatility Index to the performance of the vanilla S&P 500 Index.

Source: S&P 500 Low Volatility Index, Monthly Fact Sheet

The S&P 500 Low Volatility Index has delivered nearly 200 basis points per year of alpha over its benchmark during the last decade, returning 9.08% per year compared to the S&P 500’s 7.18% per year. Clearly, there is something to be said for investing in low volatility securities.

So how can investors find companies with high probability of delivering low volatility and high returns (which combine to give fantastic risk-adjusted returns)? One might think that investing in stocks with low historical volatility would do the trick, but past performance is generally no guarantee of future results in the investing world. Volatility may be the exception to this rule. There are generally qualitative, fundamental reasons why a particular stock will trade with low volatility. With that in mind, this article will investigate whether the volatility of individual stock prices tends to change over time, using the Dividend Aristocrats – stocks with 25+ years of consecutive dividend increases – as our sample.

Looking to Extreme Values to Find Trends

Sometimes, the best way to identify trends in the financial markets is to look at extreme values. With that in mind, this section will investigate the volatility variance (or volatility volatility, if you will) of the top 5 and bottom 5 most volatile Dividend Aristocrats, using a 10-year look-back.

The top 5 most volatile Dividend Aristocrats are:

1. Aflac (AFL): 44% annualized price return standard deviation
2. Nucor (NUE): 40% annualized price return standard deviation
3. T. Rowe Price Group (TROW): 40% annualized price return standard deviation
4. Franklin Resources (BEN): 38% annualized price return standard deviation
5. Federal Realty Investment Trust (FRT): 36% annualized price return standard deviation

I will now investigate on a one-to-one basis the variance in individual stock price volatilities of these securities over time.

First, Aflac:

Source: YCharts

Aflac’s stock price volatility has varied from a maximum of 60.0% to a minimum of 30.1%, with a current value of 43.8%. Aflac’s stock price is very volatile, and this is likely because of the unpredictable nature of the insurance industry. Insurance earnings (and, as a result, stock prices) can vary wildly depending on two uncontrollable factors:

• The volume of insurance claims filed during a given time period
• The dollar value of investment income generated during a given time period

The next high-volatility Dividend Aristocrat that we will consider is Nucor:

Source: YCharts

Nucor’s stock price volatility has varied from a maximum of 48.5% to a minimum of 30.0%, with a current value of 40.4%. Nucor’s stock price is consistently volatile: the lowest 10-year stock price standard deviation Nucor has achieved is 30%, which is still quite high. Like Aflac, there are fundamental, qualitative reasons why Nucor’s stock price is volatile. As the largest steel manufacturer in the United States, Nucor’s earnings (and stock price) are unsurprisingly dependent on the price of steel and other related commodities. When the market value of steel commodities fluctuates, so does Nucor’s stock. This is the driver of Nucor’s high volatility. The next Dividend Aristocrat up for consideration is T. Rowe Price, a large asset management firm:

Source: YCharts

T. Rowe Price’s stock price volatility has varied from a maximum of 46.2% to a minimum of 38.3%, with a current value of 39.7%. The spread between T. Rowe Price’s maximum volatility and minimum volatility is quite narrow, which shows that this stock (like Nucor) is consistently volatile. This is very common in T. Rowe Price’s industry (asset management). These businesses are ‘doubly exposed’ to stock market fluctuations. When markets move (either upwards or downwards), three things happen that effect T. Rowe Price’s stock price:

1. The stock will usually move in the same direction as the market, assuming nothing changes about the underlying business
2. T. Rowe Price’s assets under management will organically shrink or grow due to the market’s investment returns, which result in corresponding changes to the firm’s earnings
3. Investors will add to (in a bull market) or remove (in a bear market) assets from their T. Rowe Price investment accounts, which exacerbate the impact of market movements on the firm’s earnings

While #1 will occur with mostly any publicly traded business, #2 and #3 are unique among asset managers and explain why they typically have higher stock price volatility than the rest of the market. For another example of a high volatility asset manager, consider none other than the next stock on our list for this analysis: Franklin Resources.

Source: YCharts

Franklin Resources’ stock price volatility has varied from a maximum of 51.8% to a minimum of 32.5%, with a current value of 38.0%. Franklin Resources’ high stock price volatility can be attributed to its presence in the asset management industry, as was explained for T. Rowe Price previously. The last high volatility Dividend Aristocrat that we will consider is Federal Realty Investment Trust, a real estate investment trust (REIT):

Source: YCharts

Federal Realty Investment Trust’s stock price volatility has varied from a maximum of 39.1% to a minimum of 20.1%, with an average value of 36.0%. Federal Realty’s current stock price volatility is close to its all-time high. Moreover, it looks like the stock’s volatility is meaningfully higher than its levels during the 1991-2007 period. Thus, it appears that Federal Realty’s currently elevated stock price volatility can be partially attributed to the events of the 2007-2009 financial crisis, which hurt the broader asset class of REITs and reduced investor confidence in this security type. Moving on, this analysis will now cover the Dividend Aristocrats that currently have the lowest stock price volatility. The top 5 least volatile Dividend Aristocrats are:

1. Johnson & Johnson (JNJ): 17% annualized price return standard deviation
2. Consolidated Edison (ED): 18% annualized price return standard deviation
3. PepsiCo (PEP): 18% annualized price return standard deviation
4. Procter & Gamble (PG): 18% annualized price return standard deviation
5. Clorox (CLX): 18% annualized price return standard deviation

Interestingly, there is much less difference in volatility between the top 5 least volatile Dividend Aristocrats when compared to the top 5 most volatile Dividend Aristocrats. The least volatile securities have a 1% difference between the 1st and 5th stocks, compared to an 8% difference between the 1st and 5th stocks in the higher-volatility group. This suggests there is more ‘competition’ to be a low volatility stock among the Dividend Aristocrats, which is unsurprising given that these are some of the most high-quality businesses around. As before, this analysis will now investigate the volatility variance in the top 5 least volatile Dividend Aristocrats over time.

First, Johnson & Johnson:

Source: YCharts

Johnson & Johnson’s stock price volatility has varied from a maximum of 28.3% to a minimum of 16.1%, with a current value of 16.6%. Johnson & Johnson’s low stock price volatility can be attributed to two main factors. First, Johnson & Johnson operates in the healthcare sector. The company’s three segments (Pharmaceuticals, Medical Devices, and Consumer) create products that are necessary for the vast majority of its customers. This creates a profound level of recession resistance, even when compared to the Dividend Aristocrats.

Secondly, Johnson & Johnson is the largest healthcare stock in the world. The company has such a deep level of inherent diversification that declining market share in some of its product categories will typically be offset by growth in other regions. Case-in-point: Johnson & Johnson has grown its constant-currency adjusted earnings-per-share for 33 consecutive years, the longest streak of any public company (to my knowledge). The next Dividend Aristocrat under consideration is a favorite among low volatility investors: Consolidated Edison.

Source: YCharts

Consolidated Edison’s stock price volatility has varied from a maximum of 33.4% to a minimum of 16.5% with an average value of 17.6%. Consolidated Edison is one of the most well-known low volatility dividend stocks, and for good reason: the company’s maximum historical stock price volatility is lower than the minimum stock price volatility of some of the more volatile Dividend Aristocrats. Consolidated Edison’s low volatility is a function of the industry in which it operates. Consolidated Edison is a regulated utility, which means it is virtually guaranteed to generate an earnings stream that grows slowly and consistently over time. For these reasons, Con Ed (and other regulated utilities) appeal to retirees and other types of conservative investors. The next Dividend Aristocrat under consideration is a well-known consumer staples giant, PepsiCo:

Source: YCharts

PepsiCo’s stock price volatility has varied from a maximum of 33.4% to a minimum of 17.4%. It is unsurprising that PepsiCo exhibits a low level of stock price volatility. Pepsi’s products (sodas and potato chips) are very low-cost, so even though they are unhealthy, sales tend to remain flat or even grow through recessions. The next Dividend Aristocrat we’ll investigate is another well-known consumer staples business, Procter & Gamble:

Source: YCharts

Procter & Gamble’s stock price volatility has varied from a maximum of 29.6% to a minimum of 17.7%, with an average value of 17.8% (P&G’s current volatility is very close to its all-time low). Procter & Gamble is a diversified provider of household products that operates with an exceptional degree of geographic diversification. Products like laundry detergent, soap, and deodorant are not the types of expenditures that you will cut when recessions hit, which helps Procter & Gamble to perform well during recessions. The last of the low volatility Dividend Aristocrats to be discussed is Clorox:

Source: YCharts

Clorox’s stock price volatility has varied from a maximum of 50.0% to a minimum of 18.4%, with a current value of 18.4% (equal to its all-time low).

Clorox’s low volatility is similar to that of Procter & Gamble: as a manufacturer, marketer, and distributor of household consumer products, Clorox’s sales tend to stand up well to periods of economic downturn. This section provided a significant amount of data on the volatility trend of ten Dividend Aristocrats. A summary of our findings can be seen in the following table:

Source: YCharts

The observations that can be made from this table are rather unsurprising. Low volatility Dividend Aristocrats tend to have lower values for both maximum volatility and minimum volatility when compared to their high volatility peers. They also tend to have a narrower band between their maximum and minimum levels. However, even the low volatility stocks had a significant amount of variance in their rolling 10-year stock price volatilities (particularly Clorox). This suggests that the low volatility dividend stocks of today might not be the same as the low volatility dividend stocks of ten years ago.

A Percentile-Based Approach

The previous section showed that the absolute volatility of dividend stocks has potential to change over time. However, much of this change can be attributed to changes in market volatility. Said another way, much of the change in the volatility of these individual dividend stocks is due to changes in the average volatility of the overall stock market. Certain periods (particularly severe recessions like the 2007-2009 financial crisis) have significantly more volatility than normal, while other periods (like today’s low volatility stock market) have less volatility than normal. So how do we measure changes in overall market volatility? There are two ways: using historical volatility or using forward looking options-implied volatility.

The first measure – historical volatility – is easy to calculate. Simply compute a traditional standard deviation metric for the long-term price returns of the S&P 500 Index (or some other benchmark for broad-based equity performance).

The second measure, options-implied volatility, is quite complicated to calculate and involves inputting different variables into the Black-Scholes options pricing model. Fortunately, financial market participants have created a benchmark to measure the options-implied volatility of the equity markets.

The VIX index, an implied volatility benchmark whose value is determined by calculating the implied volatility in current S&P 500-based derivatives, is used as a proxy for market-wide volatility expectations. The following diagram shows that the VIX index has shown the capability for enormous change over time.

Source: YCharts

Right now, the stock market is experiencing a period of remarkably low volatility. It is not surprising, then, that the 10 Dividend Aristocrats analyzed in the previous section are almost all trading at their lowest historical volatility. This means that we should not be concerned with the absolute volatility of dividend stocks. If a company’s stock becomes meaningfully less volatility as a result of reduced market volatility, that single stock is not suddenly a low volatility dividend stock unless its volatility has been reduced significantly more than the market’s volatility. Conversely, if a stock with historically low volatility (like Johnson & Johnson) experiences a surge in volatility because market volatility rises, the stock could still be a low volatility security if it is still trading with less volatility than the average security on a relative basis.

To take these factors into account, this section will present similar data as the previous section: a case-by-case analysis of stock price volatility over time. However, instead of using absolute stock price volatility, we will compare a stock’s relative volatility over time by presenting its volatility percentile.  I’ll be again looking at the most & least volatile Dividend Aristocrats to find trends. To reiterate, the most volatile Dividend Aristocrats are:

1. Aflac (AFL)
2. Nucor (NUE)
3. T. Rowe Price Group (TROW)
4. Franklin Resources (BEN)
5. Federal Realty Investment Trust (FRT)

The following 5 charts present the relative volatility of these 5 stocks over time, expressed as a percentile relative to the rest of the Dividend Aristocrats list.

First, Aflac:

Source: YCharts

Aflac’s stock price volatility has ranged from the 92nd percentile to the 16th percentile, with a current value in the 82nd percentile. This is a significant difference in rankings, but Aflac’s relative volatility spiked noticeably during the 2007-2009 financial crisis and has remained elevated ever since. This is unsurprising, as any stock that was even peripherally related to the financial sector took a beating during the Great Recession. The next Dividend Aristocrat whose relative volatility will be investigated is Nucor:

Source: YCharts

Nucor’s stock price volatility has ranged from the 88th percentile to the 45th percentile, with a current value in the 62nd percentile. This stock has been persistently volatile, rarely falling beneath the 50th percentile. Clearly, Nucor’s strong relationship with the price of steel has resulted in a significant degree of inherent stock price volatility. Next, the relative volatility of one of our two asset managers, T.Rowe Price, will be investigated:

Source: YCharts

T. Rowe Price’s stock price volatility has ranged from the 88th percentile to the 49th percentile, with a current value in the 54th percentile.

Like Nucor, T. Rowe Price’s stock price volatility has rarely fallen below the 50th percentile of S&P 500 stock volatilities. Also like Nucor, this has been caused by the business model (asset management) of the underlying company.

Next, we’ll consider the second asset manager, Franklin Resources:

Source: YCharts

Franklin Resources’ stock price volatility has ranged from the 98th percentile to the 38th percentile, with a current value in the 59th percentile.

Again, Franklin Resources’ stock price volatility has rarely fallen beneath the 50th percentile. This is similar to its asset manager peer, T. Rowe Price.

The last high volatility Dividend Aristocrat under consideration is Federal Realty Investment Trust:

Source: YCharts

Federal Realty Investment Trust’s stock price volatility has ranged from the 48th percentile to the 2nd percentile, with a current value in the 31st percentile.

Although Federal Realty’s stock price volatility is high among the Dividend Aristocrats, it is still in the 31st percentile of the S&P 500. Clearly, the Dividend Aristocrats are – on average – lower volatility than the broader S&P 500 universe.

That concludes the analysis of high volatility Dividend Aristocrats. Next, we’ll consider the low volatility equivalents.

The five Dividend Aristocrats with the lowest stock price volatility are:

• Johnson & Johnson (JNJ)
• Consolidated Edison (ED)
• PepsiCo (PEP)
• Procter & Gamble (PG)
• Clorox (CLX)

I’ll now present five charts to show the relative volatility of these 5 stocks over time.

First up is healthcare giant Johnson & Johnson:

Source: YCharts

Johnson & Johnson’s stock price volatility has ranged from the 27th percentile to the 0th (zeroth) percentile, with a current value in the 0th (zeroth) percentile.

This stock’s volatility has changed over time, but since the 2007-2009 financial crisis, Johnson & Johnson has remained at or below the 2nd volatility percentile for S&P 500 stocks.

The next stock under consideration is regulated utility Consolidated Edison:

Source: YCharts

Consolidated Edison’s stock price volatility has ranged from the 73rd percentile to the 0th (zeroth) percentile, with a current value in the 2nd percentile.

Surprisingly, Consolidated Edison has not always been a low volatility dividend stock. The security nearly breached into the top volatility quartile in the late 1970s and early 1980s, before its volatility moderated to the bottom decile (where it has remained ever since).

Next, PepsiCo:

Source: YCharts

PepsiCo’s stock price volatility has ranged from the 47th percentile to the 1st percentile, with a current value in the 1st percentile (very close to its all-time low percentile rank).

Like Johnson & Johnson, PepsiCo has remained below the 5th percentile since the 2007-2009 financial crisis.

The next stock under consideration is consumer staples conglomerate, Procter & Gamble:

Source: YCharts

Procter & Gamble’s stock price volatility has ranged from the 29th percentile to the 0th (zeroth) percentile, with a current value in the 2nd percentile. Procter & Gamble is a consistently low volatility dividend stock, as its volatility rank within the S&P 500 has never exceeded the 30th percentile.

The last low volatility Dividend Aristocrat under consideration is Clorox.

Source: YCharts

Clorox’s stock price volatility has ranged from the 93rd percentile to the 1st percentile, with a current value in the 1st percentile (nearly equal to its all-time low percentile rank). In the first section of this analysis, we saw that Clorox had previously had a very high stock price volatility (nearly 50%). This percentile-based analysis shows that Clorox’s previously high stock price volatility was not just high on an absolute basis, but also very high relative to the rest of the S&P 500. Clorox’s volatility was in the top decile during that time period. The findings of this percentile-based volatility analysis are summarized in the following table:

The data from this table suggests that the volatility percentiles of individual stocks can change significantly over time. This applies to both high volatility dividend stocks (Aflac moved from the 92nd volatility percentile to the 16th volatility percentile) and low volatility dividend stocks (Clorox moved from the 93rd volatility percentile to the 1st volatility percentile, while Consolidated Edison moved from the 73rd percentile to the zeroth percentile).

Final Thoughts

This analysis unearthed some interesting insights on the volatility characteristics of dividend stocks. In the first section, it was shown that the volatility of individual stocks (when measured on an absolute basis) has the ability to change significantly over time. The second section introduced the hypothesis that some of the changes in the volatility of individual stocks can be attributed to changes in overall market volatility. While this is likely true to an extent, individual stocks certainly have the ability to change their relative volatility over time. Aflac and Clorox stand out as stocks whose volatility percentiles have experienced significant changes over time. With that said, many of the most stable, recession-resistant stocks (like PepsiCo, Johnson & Johnson, or Procter & Gamble) have persistently low volatilities over long periods of time.

That’s why stock price volatility is one of the ranking factors in The 8 Rules of Dividend Investing. While individual stocks may experience significant changes in price volatility, we believe that – on average – the volatility of the best businesses should remain relatively low over long periods of time.