The bear market that has roiled stock investors over the past 12 months has renewed focus on safety and quality. This means that investors have once again focused more on reliable dividend paying stocks, as they tend to offer better dividend security and recession resilience.
With a possible recession looming in 2023, we’re looking for dividend stocks with the best chances to continue increasing their payout regardless of economic conditions. We believe that these are the companies that will outperform during bear markets.
Below, we highlight three names we love that meet those criteria.
Our first stock is General Dynamics (GD), an aerospace and defense company that operates around the world, but is headquartered in the United States. General Dynamics has four operating segments: Aerospace, Naval Systems, Combat Systems, and Technologies. Through these segments, the company offers a wide range of military and civil aviation equipment, as well as cargo and container ships, maintenance services, wheeled and tracked combat vehicles, communications services, intelligence services, and much more.
Founded in 1899, the company has annual revenues of $39 billion and trades with a market capitalization of $68 billion.
General Dynamics has tremendous resilience in the face of a downturn because so much of its revenue is tied to long-term contracts. In addition, these contracts are mostly with governments around the world, and for critical defense products and services, which means that the contracts have a high probability of continuing regardless of economic conditions. Thus, General Dynamics tends to see fairly stable earnings during tough economic periods.
The dividend yield for the year is just over 40%, which is representative of where the stock has been overall in the past decade. Given the stability of the company’s earnings, especially in recessions, we find that payments are quite safe here.
The company has raised its dividend for an impressive 31 straight years, in large part because it’s been able to weather a recession. The company’s management team has demonstrated its willingness and ability to ensure shareholders receive higher capital returns each year, and we believe there are many more increases to come.
General Dynamics’ yield is currently over 2%, so it’s slightly better than the S&P 500 stock average in this metric. However, General Dynamics stands out with nearly a 10% increase in its average annual earnings in the past decade. This puts shares in a company that is scarce on dividend growth, especially given the longevity of the dividend.
Finally, we see average annual earnings growth of 6% in the coming years, which should provide more than enough capital to continue the company’s impressive streak of dividend increases, recession or not.
An essential component of profit distribution
Our next inventory is Colgate-Palmolive (CL), a FMCG company that manufactures and distributes a variety of consumer products globally. The company offers toothpaste, mouthwash, soaps, bath products, deodorants, skin health, dishwashing, laundry detergents, and more. The company’s portfolio of brands includes Colgate, Ajax, Irish Spring, Palmolive, and more. In addition, Colgate has a pet nutrition company that operates under the name Hill’s Science Diet, offering pet foods and some therapeutic treats for pets.
Founded in 1806, Colgate generates annual revenues of just under $18 billion and trades with a market capitalization of $66 billion.
Colgate’s resilience to a recession is almost unmatched as its portfolio contains a long list of consumer items that consumers purchase regardless of economic conditions. While this can lead to a lack of growth options during good times, this defensive tactic can help Colgate perform very well when other companies are struggling. This flexibility is a big factor in why the company has been able to grow its dividend for an amazing 60 consecutive years, which puts it in the elite company for longevity.
The payout ratio is also less than two-thirds of the earnings, and due to its outstanding earnings stability, we see it as quite safe. Plus, it leaves plenty of room for future increases.
Colgate’s yield is respectable at about 2.4% today, so it’s a quality income stock, especially given the longevity it’s shown with dividend increases. Finally, we expect the company to grow its dividend at 6% annually going forward, recession or not, which gives the management team plenty of room to grow dividends in the future.
Our third recession-proof stock is Abbott Labs (ABT), a healthcare company that discovers, develops, manufactures and distributes various medical devices, consumer products, pharmaceuticals and diagnostic products globally. The company makes and sells an enormous range of treatments for a long list of indications, as Abbott’s philosophy has been to diversify significantly, rather than focus on one or two areas of treatment.
Founded in 1888, Abbott produces about $43 billion in annual revenue, and today it trades with a market capitalization of $191 billion.
Abbott’s resilience in the face of a downturn comes down to two things. First, it’s in the medical/pharmaceutical business, which generally behaves like a consumer staple during recessions. In other words, if someone needs medical treatment for something, they generally don’t have to worry about the prevailing economic conditions; They are simply looking for a cure. Second, Abbott’s portfolio is highly diversified, so even if it loses patent protection on a drug or a competitor makes a better device, Abbott’s portfolio can generally absorb weakness in one or two areas.
This is why Abbott has been able to increase its dividend for 50 consecutive years, and why it is one of the best dividend stocks on the market today according to this metric. The yield is relatively small at 1.9%, but it’s still better than the S&P 500, and Abbott’s payout ratio is only 36%. That leaves plenty of room for dividend security, as well as future increases, all with the assurance that Abbott will continue to build on its half-century long streak of payout increases.
Finally, we see average annual earnings growth of 5% in the coming years, which means Abbott is a great mix of growth and dividend security, especially given the stability of its earnings during recessions.
When the economy is in a recession, that can certainly affect investors. Asset prices fall, and profits of weaker companies tend to be cut or suspended altogether.
However, by choosing the strongest and most recession-resistant stocks, we can reduce the likelihood of suffering a significant dividend cut, and we like General Dynamics Laboratories and Colgate-Palmolive & Abbott for that reason.
All three offer returns that beat the market, decades-long dividend-growing streaks, tremendous earnings stability and predictability, and meaningful growth prospects.
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