What are Widow and Orphan stocks?
Widow and Orphan stocks offer relatively low-risk stocks as an investment opportunity while providing a high rate of dividend. Usually, stocks that classify as Widow and Orphan stocks belong to large, mature and reliable companies that operate in the non-cyclical business sectors. In simpler terms, widow and orphan stocks are low volatility stocks that offer higher rates of dividend and the usual holders of this type of stock are blue-chip or large and reliable companies.
The reason most companies with stocks classified as widow and orphan stocks are large and belong to non-cyclical business sectors is that even during an economic downfall, these companies still have solid footing and aren’t affected as strongly as companies in the rest of the market.
Widow and orphan stocks may not provide the highest rate of returns, they are low but steady and cushioned by the dividend provided and their powerful or even monopoly-like position in the market. The exact opposite of the widow and orphan stock concept is an investment in growth stocks that offer a higher return while being considerably more volatile and also paying out little to no dividend to the stockholders.
The term widow and orphan stocks come from the idea that these stocks offer a haven to investors during economic turmoil, particularly fit for ‘widows and orphans’ as they are the most vulnerable groups in society who aren’t adequately suited to face an immense economic downturn.
Importance of Widow and Orphan stocks
As the mindset goes for most traditional investors and new investors to invest in companies like ITC, Reliance Industries and Tata. Why? Because these are reliable, mature and resilient stocks and even if the country sees a major economic downfall these companies won’t go down under. Widow and Orphan stocks offer:
- A sense of security to investors that a base part of their market investments is safe while facing steady although potentially slower growth.
- A high rate of dividend as compared to growth based stocks cushion the comparatively lower rate of return on their investments in these blue-chip stocks.
Widow and Orphan stocks allow investors to set up their investing base and potentially take a few bigger risks with other stocks since they know they have a haven in the condition of loss in those areas. As a simple exemplary question, when starting your investment journey, would you first invest in safer opportunities that provide stability to your portfolio or would you directly jump into highly volatile and dynamic markets like penny stocks?
Pros and Cons of Widow and Orphan stocks:
Pros:
- They offer a stable and low volatility investment with a beta meaningfully less than one in most cases.
- Potential for high dividend growth rate
- Steady returns
- Ideal for safe players and new investors
- Companies with widow and orphan stocks are usually very large, reliable and mature.
- Respond better to market fluctuations and economic hurdles.
Cons:
- Offer a lower rate of general returns
- Sometimes, for fairly short periods, even safe stocks from seemingly safe sectors can add to market volatility and this may lead to the widow and orphan stocks underperforming as compared to normal cyclical sector stocks.
- Widow and orphan stocks cannot protect an investor or company from certain types of risks such as lawsuits or unforeseen incidents. E.g. A plant fire or building collapse.
- Difficult to detect when corporate executives commit fraud by “cooking the books” and fraudulently achieving profit goals.