3 Recession-Proof Dividend Stocks

Stocks have been extremely volatile to start 2022, as the prospect of record highs in the major indexes coupled with economic uncertainty has resulted in big moves in both directions. Interest rates have been a hot topic, as inflationary pressures have caused the prices of commodities to spike in a lot of cases, and as short-term rates have overtaken long-term rates in what is known as yield-curve inversion. All of these factors have created angst and volatility, but, in our view, the best way to deal with such conditions is to own high-quality dividend stocks. Not all dividend stocks are created equal, however, and the prospect of a potential recession this year means investors must be more vigilant than ever in selecting the best companies for their portfolio. In this article, we'll take a look at the potential for a 2022 recession, as well as three recession-proof stocks that pay ample dividends to shareholders. Potential for a 2022 Recession Putting odds on a recession for any particular period is always a challenging exercise. However, Wall Street firms have done their best to forecast a recession for this year given the massive impact such an event would have on interest rates and equity values. Some forecasts are as high as 40% that we see a recession in the remaining nine months of 2022 -- so let's take a look at how that may happen. One factor for a potential recession is inflation, as the combination of war in Ukraine as well as preexisting supply-chain shortages have produced large spikes in the prices of many goods. In addition, wage inflation has hit companies' bottom lines, resulting in pricing increases to help combat that. And finally, freight and logistics inflation is another contributing factor to rising operating costs, which businesses generally try to pass onto end users. As inflation rises sharply, it can eventually curtail consumer spending, which often results in a slowdown of economic activity. Given consumer spending is about two-thirds of the U.S. economy, that can quite easily send the economy into a recession. One impact of this inflationary environment that can portend a recession is the yield curve, which is simply the rates of various maturities of U.S. Treasuries. Inversion occurs when shorter-term Treasuries have higher yields than longer-term ones, which is abnormal. Generally, investors demand more interest for tying up their money for longer periods, but in a recession, short-term rates tend to overtake longer rates. That is what has happened in recent weeks as the 2-Year Treasury yield has converged on the 10-Year. When that happens, it has almost always resulted in a recession, so that's something investors would do well to monitor going forward. Now, let's take a look at three stocks we think will do well in this tough environment of inflation and the potential for rate hikes. Bristol-Myers Squibb Our first stock is Bristol-Myers Squibb , a biopharmaceutical company that discovers, develops, licenses, manufactures, and markets its products globally. Bristol-Myers has a fairly diverse product catalog including treatments for hematology, oncology, cardiovascular, immunology, and Covid-19, among others. The company was founded in 1887, generates about $47 billion in annual revenue, and trades with a market cap of $157 billion following a massive rally in the past couple of months. We like Bristol-Myers in this environment because it is naturally recession-proof with its biopharmaceutical portfolio, as patients generally seek treatment irrespective of economic conditions. In addition to that, the stock yields about 3%, which is more than double that of the S&P 500, so it is a strong income stock. Bristol-Myers' dividend safety is exemplary, with the payout ratio for this year projected at just 28%. That means that not only is the dividend safe under any reasonable circumstance, but there is also ample room to raise the payout going forward. The company has a 15-year dividend increase streak today, and we expect that streak to continue indefinitely. V.F. Corp. Our next recession-proof name, V.F. Corp. , designs, produces, markets, and distributes branded lifestyle apparel, footwear, and accessories for men, women, and children globally. V.F. is a highly diversified apparel and accessories company serving a huge range of end markets worldwide, and owns some very lucrative brands such as Dickies, North Face, Supreme, Vans, and more. V.F. was founded in 1899 and has grown its way to $12 billion in annual revenue, as well as a market capitalization of $22 billion. V.F. offers shareholders a very strong 3.5% dividend yield today, after a lot of weakness in the share price. Investors appear to be pricing in a recession for V.F., but we note that the company has been able to raise its dividend for a staggering 49 consecutive years. That period has included numerous recessions, so we believe the payout to be safe. We expect a payout ratio of 63% for this year, so barring a catastrophic recession, V.F. Corp. looks like a bargain in today's market. Franklin Resources Our final stock is Franklin Resources , an asset management holding company that operates primarily in the U.S. The company offers an array of mutual funds covering equity, fixed income, and multi-asset mutual funds that it sells to individuals, pensions, trusts, institutions, and partnerships. Franklin was founded in 1947, generates almost $9 billion in annual revenue, and has a market cap of $14 billion. Like V.F., Franklin has an outstanding dividend increase streak of 42 years. The company's funds have done well enough in recessionary environments for it to continue to not only pay, but raise its dividend year after year, and we don't see the near future as any different. The payout ratio is expected to be just 33% for 2022, and the stock yields 4%, which is three times that of the S&P 500. So, even in the event of a recession, shareholders get a stock with a very safe dividend yield of 4%, which is highly attractive. Final Thoughts While the odds of a recession may be increasing, we believe the best way to handle such a situation is through selecting recession-resistant, high-yield dividend stocks. These stocks -- such as Bristol-Myers, V.F., and Franklin -- have stood the test of time with their dividends and have naturally recession-resistant business models. They all offer market-beating yields and high levels of dividend safety, and we like all three on the possibility of a 2022 recession.

3 Recession-Proof Dividend Stocks

The prospect of a potential recession this year means investors must be more vigilant than ever in selecting stocks for their portfolio.

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