What Is a Widow-and-Orphan Stock?

Widow-and-orphan stock refers to an equity investment that often pays a high dividend and is moreover generally considered low-risk. These tend to be large, mature, stalwart companies in non-cyclical business sectorꦿs.

Understanding Widow-And-Orphan Stocks

Widow-and-orphan stocks usually are found in non-cyclical sectors such as utilities and consumer staples, which tend to hold up better during economic downturns. For example, many investors had considered AT&T prior to✅ its government break-up in 1984 a widow-and-orphan stock, meaning they found it to be of lower risk and suitable for even some of the most vulnerable members of society.

Widow-and-orphan 🦂stocks generally provide low, but steady returns cushioned partly by their dividends or monopoly-🍸like positions. In comparison, growth stocks with high price-earnings multiples that do not pay dividends are the opposite of widow-and-orphan stocks.

Special Considerations

Most investors think of regulated utilities as widow-and-orphan stocks because many of these investments tend to trade in fairly narrow average true ranges and also have lower peak-to-trough volatility over a full market cycle, compared with the average stock. What’s more, the majority of them often pay steady dividends backed by meaningful cash flows. As a result, some have 澳洲幸运5开奖号码历史查询:coverages ratios that are comparatively high. This is partly because of their fair🅠l🥀y steady earnings, driven by customer demand that changes little, even when the economy is weak.

The downside is that regulated 澳洲幸运5开奖号码历史查询:utilities cannot charge customers a premium during periods of peak demand, as the goveꩵrnment controls the prices they charge. All rate increases must be approved. Partly as a result, earnings tend to rise slowly over time, but not as fast as those of highly successful companies in non-regulated cyclical industries. For this reason, younger investors and those seeking higher returns tend to shy away from widow-and-orphan stocks, although they appeal to investors seeking steady returns.

Pros and Cons of Widow-and-Orphan Stocks

Few investors use the term widow-and-orphan stock today, and tend to call many of the equities in this category low-volatility investments. To qualify, these stocks typically need to have a beta meaningfully below 1. Some investment managers specialize in these types of stocks and build up a track record of beating a low-volatility market index by selecting equities with potential for a higher 澳洲幸运5开奖号码历史查询:dividend growth rate, as well as price appreciation.

Sometimes there are fairly short time frames in which fairly safe stocks in seemingly s✨afe sectors add to market volatility, rather than evening out returns. When this happens, widow-and-orphan stocks can underperform cyclical🔯 stocks.

Also of note, widow-and-orphan stocks cannot avoid 澳洲幸运5开奖号码历史查询:specific risk, such as a consumer staples compan⛦y facing a significant lawsuit, or a utility company facing a plant fire that knocks out capacity for an extended time period.

Moreover, it’s hard to tell when corporate executives using creative accounting to 澳洲幸运5开奖号码历史查询:cook the books, a technique management teams sometimes use to fraudulently achieve profit goals. Companies made headlines for cooking the books far more frequently in the late 1990s,✃ but the poi♐nt is, fraud tends only to be revealed over time, and no sector is immune.