The bear market that has roiled stock investors for the past 12 months has renewed focus on safety and quality. That means that investors have once again focused more on stocks that pay reliable dividends, as they tend to offer the best earnings security and recession resilience.
With a potential recession looming in 2023, we look for those dividend stocks with the best chances of continuing to raise their payouts irrespective of economic conditions. We believe it is these companies that will outperform during bear markets.
Below, we highlight three names we like that meet those criteria.
A Dynamic Opportunity
Our first stock is General Dynamics (GD) , an aerospace and defense company that operates worldwide, but is based in the U.S. General Dynamics has four operating segments: Aerospace, Marine Systems, Combat Systems, and Technologies. Through these segments, the company offers a wide variety of military and civilian aviation equipment, as well as cargo and container ships, maintenance services, wheeled and tracked combat vehicles, communications services, intelligence services, and much more.
The company was founded in 1899, produces $39 billion in annual revenue, and trades with a market cap of $68 billion.
General Dynamics sports tremendous recession resilience because much of its revenue is tied to long-term contracts. In addition, those contracts are mostly with governments around the world, and for critical defense products and services, meaning the contracts have a high likelihood of being sustained irrespective of economic conditions. Thus, General Dynamics tends to see fairly stable earnings throughout tough economic periods.
The payout ratio for this year is just over 40% of earnings, which is about where the stock has generally been in the past decade. Given the company's earnings stability, particularly in recessions, we find the payout to be quite safe here.
The company has raised its dividend for an impressive 31 consecutive years, in no small part due to its recession resilience. The company's management team has proven willing and able to ensure shareholders receive higher capital returns each year, and we believe there are many more increases to come.
General Dynamics' yield is currently just over 2%, so it's slightly better than the average S&P 500 stock on that measure. However, General Dynamics stands out with its nearly 10% average annual dividend in the past decade. That puts the stock in rare company on dividend growth, particularly given its dividend longevity.
Finally, we see 6% average annual earnings growth in the years ahead, which should provide more than enough capital to continue the company's impressive streak of dividend increases, whether a recession strikes or not.
A Dividend Staple
Our next stock is Colgate-Palmolive (CL) , a consumer staples company that manufactures and distributes a wide variety of consumable products globally. The company offers toothpaste, mouthwash, soaps, shower products, deodorants, skin health, dishwashing and 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 business that operates under the Hill's Science Diet name, offering pet food and certain therapeutic treatments for pets.
Colgate was founded in 1806, generates just under $18 billion in annual revenue, and trades with a market cap of $66 billion.
Colgate's recession resilience is virtually unmatched as its portfolio contains a long slate of consumables that consumers buy irrespective of economic conditions. While that can lead to a lack of growth options during good times, that defensiveness can help Colgate perform very well when other companies are struggling. That resilience is a big factor as to why the company has been able to raise its dividend for a staggering 60 consecutive years, putting it in elite company on longevity.
It's payout ratio is also under two-thirds of earnings, and given its outstanding earnings stability, we see that as quite safe. Plus, it leaves ample room for future increases.
Colgate's yield is respectable at about 2.4% today, so it's a quality income stock, particularly given the longevity it has shown with dividend increases. Finally, we expect the company to grow earnings at 6% annually moving forward, whether a recession comes or not, giving the management team plenty of room for dividend increases down the road.
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 array of treatments for a long list of indications, as Abbott's philosophy has been to diversify heavily, rather than focus on one or two areas of treatment.
Abbott was founded in 1888, produces about $43 billion in annual revenue, and trades today with a market cap of $191 billion.
Abbott's recession resilience is owed to two things. First, it operates in the medical/pharmaceutical space, which generally behaves like consumer staples do during downturns. In other words, if someone needs medical treatment for something, they generally do not worry about prevailing economic conditions; they simply seek treatment. Second, Abbott's portfolio is highly diversified, so even if it loses patent protection on a medication or a competitor produces a better device, Abbott's portfolio can generally soak up weakness in one or two areas.
That is much of the reason why Abbott has been able to raise its dividend for 50 consecutive years, and why it's one of the better dividend stocks in the market today on that measure. The yield is relatively small at 1.9%, but is still better than the S&P 500, and Abbott's payout ratio is just 36%. That leaves a lot of room for dividend safety, as well as future increases, all but assuring Abbott will continue to build on its half-century long streak of raising the payout.
Finally, we see 5% average annual earnings growth in the years to come, meaning Abbott is a nice blend of growth and dividend safety, particularly considering its earnings stability during recessions.
When the economy is suffering through a recession, it can certainly take a toll on investors. Asset prices fall, and the dividends of weaker companies tend to get cut or suspended altogether.
However, by picking the strongest, most recession-proof stocks, we can dramatically reduce the possibility of suffering a dividend cut, and we like General Dynamics, Colgate-Palmolive, and Abbott Laboratories for this reason.
All three offer market-beating yields, decades-long dividend increase streaks, tremendous earnings stability and predictability, and meaningful growth prospects.