3 dividend-paying stocks to buy if the stock market collapses
Since the end of the Great Recession, growth stocks have left virtually everything else to eat their dust. But take it for the very long haul and you’ll find that dividend-paying stocks are the real money generators.
In 2013, JP Morgan Asset Management published a report comparing the performance of companies that initiated and increased a dividend to companies that did not pay a dividend over a four-decade period (1972-2012). Unsurprisingly, dividend-paying stocks wiped out non-dividend payers with an average annual return of 9.5%, compared to 1.6% for non-payers. I say “no surprise” because dividend-paying stocks are often profitable, time-tested and have clear long-term prospects. They’re beacons of profitability for investors, and it’s the perfect place to consider putting your money to work in the event of a stock market crash.
Stock market crashes and sharp corrections are inevitable
I know I just said the three scariest words an investor can hear – stock market crash – but history tells us that the likelihood of a crash or a sharp correction is high.
For example, the S&P 500‘s (SNPINDEX: ^ GSPC) Shiller’s price-to-earnings (P / E) ratio – a measure of inflation-adjusted earnings over the past 10 years – reached 37.5 on June 16, 2021. To put that in perspective, the average reading over of the last 151 years is about 16.8. The real concern, however, is that in the previous four instances where the S&P 500’s Shiller P / E ratio exceeded and held 30, the S&P 500 subsequently declined by at least 20%.
Want more proof? After each of the bear market’s previous eight lows (that is, not counting the 2020 coronavirus crash), there have been one or two double-digit percentages of decline in three years. No matter how slow or fast the recovery is, no bullish market rebound is without double-digit hiccups. We have yet to see this double-digit drop in the benchmark S&P 500, and we are 15 months from the low point of the pandemic.
History also tells us that double-digit declines are common. Since 1950 we have had an official correction of the S&P 500, on average, every 1.87 years.
Buying High Quality Dividend Stock Can Help You “Weather the Storm”
The advantage of dividend-paying stocks is that their payouts help protect against that inevitable short-term drop in stocks. And, as noted, these are generally proven companies that won’t be disrupted by economic issues.
Stock market crashes and corrections are inevitable. When the next crash hits, consider buying the next three dividend-paying stocks to weather the storm.
Johnson & johnson
Buying “boring” stocks is not a bad thing. On Wall Street, boring means predictable and highly profitable businesses. This is why the health conglomerate Johnson & johnson (NYSE: JNJ) is such a smart dividend stock to buy during a market downturn.
One of the most interesting things about Johnson & Johnson (also known as J&J) is that it is one of only two publicly traded companies to hold the coveted AAA credit rating of Standard & Poor’s. Simply put, S&P has more confidence in J&J to repay its unpaid debts than in the US federal government (AA rating) which honors its debts.
What makes Johnson & Johnson so special are the three pieces of the business puzzle that work in unison. For example, the company’s consumer health products division is growing slowly, but it provides very predictable cash flow and strong pricing power. There is also J & J’s leading medical device segment, which is currently experiencing modest growth but is uniquely positioned to take advantage of procedures as the US and global population ages. Finally, J&J derives most of its growth and its margin from pharmaceuticals. On the other hand, brand name drugs have a limited period of exclusivity. All segments of J&J have worked together to generate adjusted operating profit growth almost every year for the past four decades.
This is also a good time to mention that health stocks are very defensive. No matter how good or bad the economy is, people get sick and need prescription drugs and medical devices. This provides a base level of demand that investors can count on from J&J.
The icing on the cake is that J&J has increased its base annual payment for 59 consecutive years. You can count on two hands how many publicly traded stocks have a longer active streak of increasing their annual base payout. Suffice it to say, Johnson & Johnson’s 2.6% return and predictable operating model can (pardon the pun) pay dividends in a stock market crash.
Annaly Capital Management
I beat the drum on ultra-high yield dividend stocks Annaly Capital Management (NYSE: NLY) a lot. This is because its track record shows that it can generate a cargo of income for investors, as well as hedge against the inevitable downturns that occur in the market when investing for the long term.
Annaly Capital is a mortgage real estate investment trust (REIT). Without digging too deep into the weeds, this means that Annaly borrows money at lower short-term lending rates and uses that capital to buy assets (mortgage-backed securities) with long-term returns. higher. The difference between the higher long-term yield and the lower short-term borrowing rate is known as the net interest margin. The larger the net interest margin, the higher the profit margin for mortgage REITs. Additionally, since REITs avoid normal corporate tax rates, the larger the net interest margin, the more dividends will be paid to shareholders.
What makes Annaly so intriguing right now is the pace of the US economic recovery. In the early stages of a recovery, it is normal to see the yield curve steepen, that is, long-term Treasury bond yields rise while short-term bond yields rise. ‘flatten or shrink. When this happens, Annaly’s net interest margins widen. In short, we are in the period when mortgage REITs are outperforming.
To make matters even better, Annaly Capital Management almost exclusively buys agency-backed securities. The agency’s assets are guaranteed by the federal government in the event of default. This additional protection reduces the long-term return that Anna earns on her purchases, but it also allows the company to use leverage to her advantage to increase profits.
Over the past two decades, Annaly has averaged an annual return of around 10%. This would go a long way to partially compensating for a short-lived crash or correction and calming investors’ nerves.
Yet another “boring” stock that would be perfect to buy if the stock market crashes is the electric utility. Duke Energy (NYSE: DUK).
If you thought healthcare was a defensive industry, you didn’t see a thing until you delved deeper into electric utilities. This is because virtually all homeowners require gas or electricity service, and the demand for these services does not fluctuate much. This predictability of cash flow is one of the main reasons for the hefty returns that electric utilities pay their shareholders. In Duke’s case, we’re talking about a dividend yield of 3.8%, which almost triples the current yield of the S&P 500 (1.3%).
The most exciting development for Duke is the $ 58 billion to $ 60 billion it spent on (mostly) renewable energy projects between 2020 and 2024. The company has suggested increasing its clean energy infrastructure spending. between 65 and 75 billion Period 2025-2029. While expensive to start with, these renewable energy projects help lower the costs of generating electricity, which in turn will boost Duke’s compound annual growth rate. It will also help the second-largest electric utility by market capitalization stay ahead of any green energy legislation that may emanate from Washington.
Investors should take note that traditional Duke utilities (that is, those that are not powered by renewable energy sources) are regulated. Some people might see regulation as pain in the back. For example, Duke can’t just pass price increases on when they want. However, regulation by state utility boards also means no exposure to potentially volatile wholesale prices. Again, it’s all about predictability of cash flow.
Duke Energy is not going to wow anyone by announcing its operating results every three months. But it will be a cornerstone in investors’ portfolios if stock market volatility increases significantly.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.