The bear market that has roiled stock investors over the past 12 months has renewed its focus on safety and quality. That means investors are once again focusing more on reliable dividend-paying stocks, as they tend to offer the best income safety and recession resilience.
With a potential recession looming in 2023, we look for dividend stocks that have the best chance of continuing to grow payouts regardless of economic conditions. We believe it is these same companies that will perform better in bear markets.
Below, we’ve highlighted three names that we’d love to meet those criteria.
Our first stock is General Dynamics (GD), an aerospace and defense company operating worldwide but headquartered in the United States General Dynamics has four operating segments: Aerospace, Marine Systems, Combat Systems, and Engineering turmeric. Through these segments, the company offers a wide range of military and civilian aviation equipment, as well as cargo ships and containers, maintenance services, wheeled and tracked combat vehicles, information services communications, intelligence services, etc.
The company was founded in 1899, generates $39 billion in annual sales and trades with a market capitalization of $68 billion.
General Dynamics exhibits tremendous recession resilience because most of its revenue is tied to long-term contracts. In addition, those contracts are primarily with governments around the world and for critical defense products and services, meaning contracts that are highly maintainable regardless of economic conditions. As a result, General Dynamics tends to see fairly stable earnings during tough economic times.
This year’s payout ratio is just over 40% of earnings, roughly the same position as stocks over the past decade. Given the stability of the company’s earnings, especially during a recession, we find the payout here quite safe.
The company has increased its dividend impressively for 31 consecutive years, in no small part thanks to its resilience to the recession. The company’s management team has proven willing and able to ensure a higher return on capital for shareholders each year and we believe there will be more increases in the near future.
General Dynamics’ yield is currently just over 2%, so it’s slightly better than the S&P 500 stock average by that measure. However, General Dynamics stands out with an average annual dividend of nearly 10% over the past decade. That makes the stock the rare company with dividend growth, especially because of its dividend longevity.
Ultimately, we see 6% average annual earnings growth over the coming years, which should provide enough capital to continue the company’s impressive dividend growth streak, no matter the economic downturn. happen or not.
A dividend staple
Our next stock is Colgate-Palmolive (CL), a consumer staple company that manufactures and distributes a wide range of consumer products globally. The company offers toothpaste, mouthwash, soap, bath products, deodorant, skin health, dishwashing liquid and laundry detergent, etc. The company’s brand portfolio includes Colgate, Ajax, Irish Spring, Palmolive, etc. Additionally, Colgate has a pet nutrition business operating under the name Hill’s Science Diet, providing pet food and certain treatments for pets.
Colgate was founded in 1806, generates less than $18 billion in annual sales and trades with a market capitalization of $66 billion.
Colgate’s recession resilience is virtually unmatched as its portfolio contains a long list of consumer goods that consumers buy regardless of economic conditions. While that can lead to a lack of growth options in good times, that defensive ability can help Colgate perform very well when other companies are struggling. That resilience is a key factor in why the company was able to raise its dividend for an astonishing 60 years in a row, placing it among the longevity elite.
Its payout ratio is also less than 2/3 of earnings and due to its outstanding stable income, we find that quite safe. Plus, it leaves plenty of room for future growth.
Colgate’s dividend yield is a respectable 2.4% today, so it’s a quality earnings stock, especially given the longevity it shows in dividend increases. Ultimately, we expect the company to grow earnings at a rate of 6% annually going forward, economic downturn or not, providing the management team with ample opportunity to increase its dividend in the future. 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 manufactures and sells a wide variety of treatments for a long list of indications, because Abbott’s philosophy is to diversify aggressively, rather than focus on one or two treatment areas.
Abbott was founded in 1888, generates approximately $43 billion in annual revenue and trades today with a market capitalization of $191 billion.
Abbott’s resilience to the recession is down to two things. First, it works in the medical/pharmaceutical sector, which often acts like consumer staples during a recession. In other words, if someone needs medical treatment for something, they usually don’t worry about the current economic condition; They are simply seeking treatment. Second, Abbott’s portfolio is highly diversified, so even if it loses patent protection on drugs or a competitor makes a better device, Abbott’s portfolio as a whole could overcome weaknesses in one or two areas.
That’s largely why Abbott has been able to raise its dividend for 50 years in a row, and why it’s one of the better dividend stocks on the market today in that respect. The yield is relatively small at 1.9%, but still better than the S&P 500 and Abbott’s payout ratio is only 36%. That leaves plenty of room for dividend safety, as well as future hikes, all but ensuring that Abbott will continue to build on its half-century-long streak of payout increases. me.
Finally, we see an average annual earnings growth of 5% over the coming years, meaning Abbott is an excellent combination of growth and dividend safety, especially when it comes to stability in corporate earnings during recessions.
When the economy is going through a recession, it can certainly take its toll on investors. Asset prices fall and the dividends of weaker companies tend to be cut or suspended altogether.
However, by choosing the strongest, most recession-resistant stocks, we can significantly reduce the chance of a dividend cut, and we like General Dynamics, Colgate-Palmolive, and Abbott Laboratories for this reason.
All three offer above-market yields, a decades-long streak of dividend growth, stable and predictable earnings, and meaningful growth prospects.
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