Boring but beautiful? Can “boring” stocks help balance your portfolio?

Today, it’s rare to have a conversation about investing without talking about the big buzzy stocks driving the market. But as exciting as semiconductors, artificial intelligence and the metaverse may be, there’s a much wider world of sectors out there to invest in, including so-called boring stocks.

“Boring is beautiful” is a phrase sometimes used by investors and portfolio managers. “Boring” companies – like those Warren Buffett often invests in¹ – are those that earn steady returns, rarely experience wild stock price swings, often pay dividends and operate in areas that most would find mundane, like groceries, utilities, rail ties and industrial real estate.

Jennifer McClelland, Managing Director and Senior Portfolio Manager of North American Equities at RBC Global Asset Management, also believes that so-called “boring” stocks can play an integral role in a portfolio. “These are stocks with little drama based on historical data, where you have relatively predictable cash flow streams that are easy to track,” she explains.

This isn’t to say you shouldn’t own growth stocks, but less buzzy stocks could also play a role in your portfolio. Here are some things to consider.

Ups and downs of growth stocks
Many people like growth stocks –particularly the “Magnificent Seven” group of Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla. And for good reason: these companies have been responsible for most of the S&P 500’s gains over the last several years. In 2023, the seven stocks climbed by a collective 75.71 per cent, while the broader U.S. index rose by 24.23 per cent.²

Historically, when these companies post strong results, their stock prices have often soared. However, investors tend to have such high growth expectations for companies like these – investors typically expect to see big revenue jumps or high sales – that when these companies either don’t beat analyst expectations or exceed them by less than the market would like, shares may decline in value fairly quickly. Nvidia, for example – while up a whopping 183 per cent between the start of the year and October 16 – has had several drops, even though its last quarterly report surpassed analyst results. Between August 23 and September 6, for instance, the company’s stock price fell by about 20 per cent, according to S&P Capital IQ.³

“With tech stocks like these, the path from A to B has not always been as predictable as we may like,” says McClelland. “Sometimes earnings reports can get overblown and there is a risk in some cases that the demand trajectory isn’t at the level that’s being priced into the stock today. If that’s the case, then there can be a big difference between where a stock is trading and where it should be trading”, she says.

While some investors may be fine with some ups and downs, others may not be as comfortable. Diversification may be something to consider – as owning assets or stocks across sectors and geographies could help with one’s comfort level and keeping emotions in check.

Consider predictability
Of course, boring stocks aren’t necessarily boring businesses. Compared to big technology companies though, their growth is often more predictable, and their valuations are generally more in line with expectations. While a big surprise like an abrupt change in management or a new product launch that may not align with a company's core competencies could lower even a boring stock’s price, "boring" stocks generally experience lower volatility in relation to major indices (beta).

Additionally, consistency could be attractive to some – “investors may be drawn to stocks less likely to keep them up at night,” says McClelland. “Historically, it’s not often that a quarterly report makes the stock fall by many per cent.”

The utility sector, in particular, is a good example of the boring is beautiful adage, says McClelland. The industry, which is regulated, provides companies with a fixed return they can rely on. Every few years, these companies can negotiate for higher returns and in most cases, any money they spend on improvements can get passed on to the consumer.

Utilities are sensitive to interest rates – some may end up having higher debt costs when rates rise, for instance – but any changes to their cash flow are highly visible to investors. “There’s so much visibility,” McClelland says. On the flipside, there’s increasing demand for energy from places like data centres, and that provides some growth. There is also an increased demand for that energy to be renewable.

Real estate also falls into this category, McClelland explains. While some real estate investment trusts (REITs) have run into problems – office-related REITs have been hit hard⁴ by people continuing to stay home after the pandemic – other parts of the real estate market are much more predictable. Industrial real estate, which includes large warehouses and shipping and receiving facilities, comes with long-term contracts – leases that can provide steady rental income for several years – while demand for these kinds of spaces is increasing, she says. “They’re basically big boxes with good cash flow streams, and they’re relatively easy to build and manage,” McClelland explains.

While some sectors may be considered more boring than others, boring companies exist in almost every industry. The key, says McClelland, is “finding a company that has visible cash flows; a business model that can’t be easily replicated; a strong balance sheet; ideally low debt and a management team that can articulate the company’s strategy and has a track record of execution. We want to see consistency, strong communication and a competitive edge.”

Long-term holdings
The other benefit of boring stocks is that because of their steady-as-she-goes nature, they could be a core part of certain portfolios for years, decades or even generations to come depending on investors’ needs and goals. Some stocks, says McClelland, may never leave her fund. “There are things in my fund that will still be there when I’m dead,” she says. “If the business model has changed or the fundamentals have shifted, I might sell, but there are names I’m going to own forever.”


¹ _{Source: The Globe and Mail: Warren Buffett Is a Boring Investor - and Here's Why You Should Be Too, April 2023}

² _{Source: Mellon: A Closer Look at Magnificent Seven Stocks, February 2024}

³ _{Data taken from S&P Capital IQ on October 16}

4 _{Source: Daily Commercial News: 'Darkest before Dawn': Another Tough Year for Office REITs but Opportunities May Lurk, February 2024}