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.
Paul J. Isaac's Arbiter Partners returned -19.3% in the third quarter of 2021, according to a copy of the hedge fund's quarterly investor correspondence, which ValueWalk has been able to review. Following this performance, the fund's return sits at -1.6% for the year to the end of September. In comparison, the S&P 500 returned 15.9%, Read More
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.
In addition to the stocks below, investors can use the free Recession Performance Analyzer tool to research how their holdings performed during the last recession.
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 properties, and the subsequent leasing of those properties to commercial tenants. Realty Income Corp currently has a portfolio of 4,646 properties in 49 states and Puerto Rico and assets valued at nearly $13 billion.
With nearly 250 commercial tenants generating annual revenue in excess of $1 billion, Realty Income Corp has cultivated the resources necessary to maintain the ideals of the company’s founders — “to use the rent collected from commercial properties held under long-term leases to support monthly dividends to shareholders.” This presents a good opportunity for dividend investors because, regardless of the state of the economy, commercial leases must still get paid. And, in the event a lease is terminated, a hefty lump-sum penalty fee is often tied to such contract violations. Realty Income Corp’s resistance to a bear market and economic volatility was clear during America’s financial crisis when the company’s sales dropped by a mere 1% and O stock declined by just 8% in 2008.
Valuing REITs is not the same as valuing more traditional stocks since the company’s primary real estate assets do not typically depreciate in value and instead appreciate. However, a depreciation figure is still calculated and appears on balance sheets, which distorts the true health of the operation and may elicit concern from the non-initiated. Instead, REITs are often evaluated based on the level of funds from operations, which is similar in nature to the cash flow from operations figures for other non-REIT securities. As of July 27, Realty Income Corp expected to generate FFO in excess of $720 million, or $2.85-$2.90 per share.
Since its 1994 IPO, Realty Income Corp has paid 533 consecutive monthly dividends and has increased those dividends for 75 consecutive quarters. Although O stock doesn’t have an impressively large dividend — currently $0.20 per share — payouts are made monthly, rather than quarterly. The annualized dividend for Realty Income Corp is $2.42 per share, which represents a yield of 3.6% and a payout ratio of 83%. Retirement investors looking for monthly income, as opposed to the traditional quarterly payouts, might do well to consider Realty Income Corp stock. Learn more about investing in monthly dividend stocks here.
5. Johnson & Johnson (JNJ)
Sector: Medical Industry: Pharma
Dividend Safety Score: 99
Forward P/E Ratio: 17.8x
Dividend Yield: 2.7%
Johnson & Johnson is perhaps one of the most well-known consumer household brand names in the United States. JNJ is actually a holding company in the business of manufacturing, developing, and selling personal care and healthcare products such as toiletries and over-the-counter pharmaceuticals. Beneath the JNJ umbrella, more than 250 businesses operate in 60 different countries and generate sales in excess of $70 billion. Of the 100+ drugs marketed by JNJ, 11 generate revenue of more than $1 billion annually. Additionally, JNJ is one of only two industrial companies in the U.S. to maintain its AAA credit rating with both Moody’s and Standard & Poor’s.
With advantages similar to Procter & Gamble, as described above, JNJ operates in a market that is relatively resistant to periods of economic volatility. Regardless of the state of the economy, people will still buy personal care products and medications. During America’s most recent recession, sales declined by only 3%, and JNJ stock was down only 8% in 2008. Further supporting JNJ during such times of economic distress is its Medical Devices division, which markets and sells medication and other supplies directly to hospitals and related facilities. Such wholesale customers are much less likely than individual consumers to reduce or eliminate purchases of JNJ goods.
Since 1963, JNJ has paid a consistent quarterly dividend and management has issued an increase every single year. With a 53-year track record, the JNJ dividend is another shining example of stability and predictability, which is why JNJ is an extremely safe dividend stock for buy-and-hold investors. Currently, the annual dividend is $3.20 per share of JNJ stock, an increase of nearly 8.5% over last year’s $2.95 per-share payout, and representing a yield of 2.67% and a payout ratio of 56%.
JNJ operations generate annual free cash flow approaching $16 billion, with 70% of JNJ’s sales coming from products that hold the No. 1 or No. 2 global market share spot. So, the JNJ stock dividend doesn’t appear to be at risk and is definitely worth considering as a prime contender in any long-term retirement or income portfolio.
6. Abbott Laboratories (ABT)
Sector: Medical Industry: Pharma
Dividend Safety Score: 92
Forward P/E Ratio: 20.1x
Dividend Yield: 2.4%
Abbott Laboratories is a Chicago-based healthcare company that manufactures, develops, and sells generic pharmaceutical products in more than 130 countries. Operating primarily in the diagnostic, nutritional, and vascular product categories, Abbott’s products include nutritional supplements for both children and adults, diagnostic testing kits for hospitals and laboratories, and a range of heart-related medical devices. Interestingly, about 50% of the company’s sales are direct-to-consumer, “making Abbott one of the most consumer-facing healthcare companies in the world,” and 70% of ABT’s revenue originates in foreign markets.
With Abbott’s growing global presence, and key position in developing middle-class emerging market economies, the company’s major business segments remain poised to capitalize on expanding healthcare capabilities in those regions. This tactic has clearly worked well for ABT stock, with share prices up more than 80% over the past decade, even considering the stock’s -2% return in 2008. A further testament to the effectiveness of the company’s strategy is the fact that sales actually increased 4% during the recent recession in the U.S.
ABT stock is attractive to dividend investors because of its impressive 43-year track record of increasing annual payouts. Currently, ABT pays a quarterly dividend of $0.26 per share, or $1.04 per year, which is an increase of 8.3% over last year’s $0.96 payout, and represents a yield of 2.35% and a payout ratio of 68%.
With a yield that’s higher than the average dividend-paying stock in the S&P 500, and management’s history of increased payouts, ABT stock is one to consider for retirement portfolios. Further, if analyst expectations prove correct regarding Abbott’s projected annual earnings growth of 10% over the next five years, ABT shareholders could likely receive even larger payouts in the foreseeable future.
Either way, even if analysts are wrong and Abbott doesn’t increase earnings by 10% or more, the stability of the company’s dividend remains solid thanks to the sheer number of people in the world who will be entering an age bracket where increased medical attention — and spending — will become necessary to maintain quality of life. This, together with management’s global growth strategy and track record of consistently boosting dividends, makes ABT a top contender on the list of safe dividend stocks.
Read More: Abbott – A Quality Dividend Aristocrat
7. General Mills, Inc. (GIS)
Sector: Consumer Staples Industry: Food
Dividend Safety Score: 98
Forward P/E Ratio: 23.2x
Dividend Yield: 2.7%
General Mills, Inc. manufactures and sells a wide variety of consumer foods through various brands both nationally and globally. Some of the most common household names including Betty Crocker, Cheerios, Haagen-Dazs, and Pillsbury are among the General Mills family, and Gold Medal flour — which was the company’s first international flagship product back in 1880 — is still the most popular flour sold in the U.S.
GIS focuses the majority of its efforts on the five food-related product categories that generate more than 75% of the company’s global net sales: cereal, snacks, yogurt, convenience meals, and ice cream. With annual revenue that has surpassed $17 billion, stemming from consistently-increasing global product sales in more than 100 countries, GIS has earned a reputation as a stable, recession-resistant stock. Over the past decade, GIS stock has increased more than 165%, and in 2008 — when the rest of the United States was struggling to survive the country’s worst financial crisis since the Great Depression — GIS was actually up more than 9% and sales activity increased 7%. Regardless of the state of the economy, people still need to eat.
Additionally, GIS has one of the longest-running uninterrupted dividend payout track records on Wall Street, with payments stretching back more than 117 years. The company’s growth model has intentionally been built around the slow pace of the packaged food industry, so GIS stock isn’t likely to skyrocket, but it’s not likely to tank, either. The most recent dividend increase was 4% and became effective on June 29, bumping the quarterly payout to $0.48 per share, or $1.92 per year, which represents a yield of 2.7% and a payout ratio of 66%.
GIS may not be a glamorous stock in a headlining industry, but that’s exactly why it’s attractive to retirement investors — on Wall Street, “exciting” usually means “volatile,” and that’s never a good thing for long-term dividend stability.
It’s never a bad idea to measure up your dividend portfolio to make sure it is still aligned with your risk tolerance and investment objectives while markets are still healthy.
The companies reviewed above aren’t necessarily cheap, but they have some of the sturdiest fundamentals a conservative investor can find.
Investors concerned most with safe income and capital preservation should keep them in mind.