In the midst of the second-longest bull market ever recorded, many conservative dividend investors are feeling increasingly anxious.
The S&P 500’s forward P/E ratio of 17.1 sits approximately 20% above its 10-year average.
To make matters even more uncomfortable for income investors, lower-for-longer interest rates have made safe haven companies such as utilities and consumer staples even more expensive relative to history.
No one knows where the market will go from here, but the following companies all have strong Dividend Safety Scores and performed well during the last recession.
While it’s hard to make a compelling valuation case for some of the stocks on this list, I believe they will still outperform again in the event of an economic downturn. If nothing else, they are high quality companies to keep on your watch list.
1. Procter & Gamble (PG)
Sector: Consumer Staples Industry: Soap & Cleaning Preparations
Dividend Safety Score: 99
Forward P/E Ratio: 22.3x
Dividend Yield: 3.1%
Procter & Gamble Co is one of the largest consumer packaged goods companies in the world. With products sold in more than 180 countries, PG’s brand portfolio includes some of the most well-known names in the beauty, grooming, health care, family care, baby and feminine care segments. Twenty-one brands within PG’s massive portfolio generate in excess of $1 billion annually, and 11 brands generate more than $500 million.
Of the ten product categories encompassing its 65 brands, PG leads in seven of them and ranks second in the remaining three. The company’s net sales for 2015 totaled $70.7 billion, and free cash flow came in at 102%. Historically, PG stock has remained a safe dividend stock, even throughout the most recent U.S. recession.
Although shares were down 14% in 2008, PG stock still outperformed the broader index by 23%. Further, despite a 3% decline in sales during the financial crisis, management upheld the company’s trend of increasing dividends, boosting the per-share payout from $1.36 in 2007 to $1.55 in 2008. Currently, PG’s dividend sits at $2.68 per share, up 1.9% from 2015, representing a 3.07% yield and a 72% payout ratio.
As the company’s brands have grown in popularity and operations have expanded across the globe, PG has enjoyed consistent and predictable positive free cash flow, regardless of bear markets and economic conditions around the world. This positive free cash flow has allowed management to faithfully increase PG stocks’ dividend every year for over five decades running.
Read More: P&G – Organic Growth Ahead? Maybe…
2. Verizon Communications Inc. (VZ)
Sector: Telecommunications Industry: Wireless Services
Dividend Safety Score: 86
Forward P/E Ratio: 13.4x
Dividend Yield: 4.3%
Verizon Communications Inc. is currently the largest telecom company in the United States, operating in multiple segments including business and residential wired telephone services, broadband internet access, and wireless telephone services. Currently, VZ claims more than 5.5 million Fios Internet customers, owns approximately 200 data centers in 24 countries and counts 99% of Fortune 1,000 companies as customers. However, the real bread and butter for VZ is its 108 million wireless customers, which account for nearly 90% of the company’s net profit.
Controlling the largest wireless network in the U.S. has helped management maintain consistent dividend payouts, as well as growth. VZ is a dividend achiever that has bumped its per-share dividend payout every year since 2004, with the latest increase of 2.3% bringing the annual total to $2.26 per share of VZ stock. This represents a yield of 4.3% and a payout ratio of 64%, which is in line with the company’s historical averages and why VZ is considered one of the more appealing, safe dividend stocks.
Even during our country’s most recent bear market, VZ stock was down only 18% in 2008, yet sales grew by 4% and management again increased the dividend. Despite the company’s massive debt load of more than $100 billion, free cash flow has remained consistent and kept dividends on the rise.
Considering that VZ’s wireless network stretches across the country, with its LTE network covering more than 2.4 million square miles, and the fact that the company ranks No. 1 in speed, data, and reliability tests, the chance of a newcomer to the wireless arena taking away market share is virtually nonexistent. Additionally, the exponential increase in mobile device usage and the ever-increasing need for Internet data give the company a solid foundation upon which VZ stock — and dividends — will continue to grow. It’s no wonder why Verizon is part of Warren Buffett’s portfolio of dividend stocks.
3. Consolidated Edison, Inc. (ED)
Sector: Utilities Industry: Electric Power
Dividend Safety Score: 97
Forward P/E Ratio: 19.2x
Dividend Yield: 3.5%
Consolidated Edison, Inc. is not only one of the oldest utility companies in the U.S., it’s also one of the largest investor-owned holding companies. It owns competitive energy businesses, most notably Consolidated Edison Company of New York, Inc. and Orange and Rockland Utilities, Inc., among others. Those companies beneath the umbrella of Con Edison operate in a variety of energy-producing arenas including electricity and natural gas, which Con Edison then sells to retail and wholesale customers. Additionally, Con Edison facilitates the development and operation of renewable energy projects in Massachusetts and California.
Traditionally, energy companies have been a mainstay in conservative, income-producing portfolios, and Con Edison is no exception. Regardless of the national economy, people will always need electricity and other types of fuel, and their position at the top of the priority list makes utility and energy companies some of the safest, most predictable stocks for dividend investors looking to supplement retirement income.
This recession-resistant status is further evidenced by the fact that Con Edison’s sales only declined by 4% during the financial crisis, and management still had the resources to increase the ED stock dividend. Con Edison has one of the most impressive, consistent track records of any dividend-paying stock on the market; the company has increased its per-share dividend payout every year for the past 41 consecutive years. The most recent increase was 3.1%, raising the ED stock dividend to its current level of $2.68 per share and representing a yield of 3.5% and a payout ratio of 68%.
It’s highly unlikely that the company will stop paying dividends any time in the foreseeable future, and with such a stellar track record, Con Edison’s divided is the epitome of stability in an otherwise volatile financial market, putting ED stock near the top of the list of safe dividend stocks.
4. Realty Income Corp (O)
Sector: Real Estate Industry: Retail
Dividend Safety Score: 86
Forward P/E Ratio: 23.7x
Dividend Yield: 3.6%
Realty Income Corp is a real estate investment trust, or REIT, whose primary business involves the acquisition and purchase of commercial