A Widow-and-Orphan Stock: What Is It?

An equity investment that often yields a substantial dividend and is regarded as low-risk is widow-and-orphan stock. Large, established businesses in noncyclical industries are often this.

Comprehending Orphan and Widow Stocks

Noncyclical industries like utilities and consumer staples often have widow-and-orphan stocks since they usually do better during recessions. Before the government broke up the company in 1984, many investors regarded AT&T as a widow-and-orphan stock, indicating that it was low-risk and appropriate for even the most vulnerable segments of society.

Widow-and-orphan stocks provide modest but consistent returns, offset by dividends or monopolistic positions. However, the antithesis of widow-and-orphan stocks are growth firms with high price-earnings multiples that don’t pay dividends.

In the past, dividends were considered the most superb option for widows and orphans or those with the courage or experience to take significant risks and execute momentum plays.

Particular Points to Remember

Because regulated utilities often move in minimal average actual ranges and have lower peak-to-trough volatility throughout a whole market cycle than ordinary stock, most investors conceive of these assets as widow-and-orphan stocks. Furthermore, it often provides consistent dividend payments supported by sizable cash flows. As a consequence, some of them have relatively high coverage ratios. This is partially due to their relatively stable revenue, fueled by consistent client demand even in lean economic times.

The drawback is that regulated utilities cannot charge their consumers more during high demand since the government sets its rates. Approval is required for any rate increases. Because of this, profits often increase gradually over time but are slower than successful businesses in unregulated cyclical sectors. Because of this, widow-and-orphan stocks are popular among investors looking for steady returns, but younger investors and those looking for more significant returns frequently avoid them.

Benefits and Drawbacks of Orphan and Widow Stocks

These days, few investors refer to stocks in this category as widow-and-orphan stocks; instead, they prefer to refer to many low-volatility investments. These equities must be considerably below 1 in beta to be eligible. These companies are the focus of some investment managers who have established a reputation for outperforming a low-volatility market index via their selection of stocks that can increase price and dividend growth.

Reasonably secure companies in what seem to be safe industries may have relatively limited time horizons where they increase market volatility rather than balance returns. Widow-and-orphan equities may underperform cyclical stocks in such a scenario.

It’s also important to remember that widow-and-orphan stocks cannot protect against some risks, such as a power firm dealing with a plant fire that renders it incapable of operating for a lengthy period or a consumer staples company facing a significant lawsuit.

Furthermore, it may be difficult to discern when corporate executives are cooking the books via creative accounting—a tactic management teams sometimes use to meet profit targets falsely. Businesses that cooked the books were in the news significantly more often in the late 1990s, but the point is that fraud usually takes time to surface and affects all industries equally.

Conclusion

• Low-volatility, high-dividend equities are widow-and-orphan stocks.
• Traditionally, investors have held these stocks as blue-chip businesses in noncyclical sectors such as consumer staples.
• Although “widow-and-orphan” is no longer widely used, investors in large-cap value stocks sometimes choose firms that fit this description.