3 Crash-Proof Dividend Stocks to Buy

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The market is having an off week and has lost ground six of the last eight days. That has some investors wondering if the rally is “too good to be true.

There’s no doubt we could be in store for some short-term volatility. There’s the “sell in May” seasonality at play that we hear so much about. Earnings season always is a period of uncertainty, where a few bad headlines could sink a sector or send the market running for cover. There also are continued fireworks in Europe, with Spain now the crisis du jour. And let’s not forget the fact that some jobs data at home was less than impressive and has caused some to wonder if the economy is healing fast enough — or still healing at all.

I know it’s hard to do … but if you’re a buy-and-hold investor, you have to just tune this out. There are a host of excellent low-risk dividend stocks that will serve your portfolio well over the next few years, even if they do take a short-term stumble. And if you’re smart, you can use a short-term slide as a buying opportunity.

So what picks should be on your radar right now even if the market could take a spill? Here are three of my favorite crash-proof dividend stocks to consider as long-term plays.

General Mills

General Mills GISHere’s an impressive stat for you: General Mills (NYSE:GIS) has paid a dividend for 113 years, never once cutting its payouts in over a century. The current yield is an attractive 3.1%, and the payout ratio — that is, the portion of profits that are dedicated to dividends — is a very sustainable 45%. Historically, most dividend stocks’ payout ratios are around 50%.

The trajectory of earnings and revenue at General Mills is understandably sleepy. After all, this is a packaged foods company and there’s only so much growth in the grocery aisles. However brands like Lucky Charms, Betty Crocker and Hamburger Helper are some of the most powerful names in the business. That means stability — and has resulted in an S&P Quality Ranking of A+, an exclusive rating reserved for only the most reliable and low-risk stocks reviewed by Standard & Poor’s.

But don’t think growth is out of the question. General Mills is building a big international presence that’s paying off. Fiscal third-quarter net sales for General Mills, reported in March, showed that international sales grew 51% year-over-year — 43% of that growth coming from a shrewd 2011 Yoplait acquisition.

In short, the dividend and balance sheet are both bulletproof. So why worry about short-term macro fears with a stock like this?

For those concerned about buying a top, it’s also worth noting that GIS stock has rolled back recently about 5% from its 52-week high in January. That might not sound like much, but the 52-week range for GIS is a very tight band of $34.64 to $41.06 — so buy the minor dip if you can, because this stock is pretty much crash-proof.

Oh, and long-term performance hasn’t exactly been sleepy, either. GIS has a five-year return of 32% vs. about 3% for the Dow Jones Industrial Average. Not bad.

Yes, rising input costs for packaged foods companies is a concern. But long-term investors should see this as an opportunity to build a position in a crash-proof dividend stock in the sector like General Mills.

DuPont

Dupont (NYSE:DD)E.I. du Pont de Nemours and Company (NYSE:DD) — or just plain old DuPont to most of us — is only the top chemicals producer in the world. It’s not a sexy business, making polymers and adhesive and the like, but it’s certainly a profitable one. It’s also worth noting that DuPont has taken great strides to move beyond nylon — with R&D centers all over the world working on genetic research, biofuels and electronics.

Like General Mills, Dupont offers a 3.1% yield, and its dividend payout ratio is about 45% based on fiscal 2011 earnings. DuPont also has paid dividends for over a century, dating back to 1904. Quite an income play, without a doubt.

On the earnings and sales side, the numbers are growing strongly. Take a look at these figures since the recession and financial crisis:

  • Fiscal 2009: $26.1 billion in revenue, $1.92 in earnings per share.
  • Fiscal 2010: $31.5 billion in revenue (+20%), $3.28 in EPS (+70%)
  • Fiscal 2011: $38.7 billion in revenue (+22%), $3.68 in EPS (+12%)
  • Fiscal 2012 Forecasts: $41.4 billion in revenue (+6%), $4.25 in EPS (+15%)

Some of that growth has come on acquisitions, such as the 2011 integration of Denmark food, chemical and biofuel company Danisco. That deal added more than $2 billion in revenue to DuPont. But organic growth also is very much part of the DuPont success story, with consistent improvement in the bottom line as shown above. The company is riding nine straight quarters of year-over-year revenue growth and four straight quarters of EPS growth as it prepares to report earnings Thursday, April 19.

DuPont is up 15% year-to-date in 2012, and seems to be heating up. However, shares remain almost 10% off their 2011 peak. What’s more, DuPont has a forward P/E of under 11 based on fiscal 2013 earnings — and a current P/E of just 14.

Admittedly, long-term performance isn’t much to scream about. The stock has a five-year return of 6% vs. 3% for the Dow — outperforming, but not by much. More troublesome is a 10-year return of just 12% vs. 26% for the benchmark Dow Jones Industrial Average.

However, there is reason to think that the past several years have been an important turning point for DuPont, as it has refocused through divestitures, acquisitions and product development. And if the last few years of big growth can’t be replicated in the years ahead? Well, then investors still can be content with DuPont’s industry dominance and nice dividend — making it an attractive low-risk investment with limited downside.

Johnson & Johnson

Johnson & Johnson (NYSE:JNJ)Many investors might not see any pharma stock as “low-risk” right now, even with a plump dividend yield. However, Johnson & Johnson (NYSE:JNJ) is not your typical pharmaceutical company because of its very strong consumer health business. Band-Aid bandages, Tylenol medications, Neutrogena skin care and Acuvue contact lens products are just a few of the items J&J sells at the grocery store instead of behind the pharmacy counter.

On the dividend front, you’ll be hard pressed to find a company with a better track record of distributions. The company has paid dividends since 1944, but more importantly has raised its dividend annually for 49 years in a row! In the past 10 years, the company has boosted distributions by a 12.4% annual rate. Think about that — as companies from Citigroup (NYSE:C) to General Electric (NYSE:GE) to Ford (NYSE:F) have shadows of their pre-recession dividends, Johnson & Johnson has been upping the ante at more than 12% per year on average.

And don’t think those increases have been from a measly sum to a slightly bigger sum. The annual payout is $2.28 a year with a headline yield of 3.5%. It has a slightly higher dividend payout ratio than these other two picks, of around 64%, but it also is one of the only four blue-chip stocks to get a AAA debt rating from Standard & Poor’s.

But enough about the dividend: Let’s talk about the prospect for growth and stability. The trouble with Johnson & Johnson lately has been serious concerns about product quality — including more than 50 drug and device recalls since 2010 thanks in part to problems at manufacturing facilities. This has been a major distraction and a hit to the company’s reputation.

However, even amid those costly recalls and the tarnish on the J&J brand, the company has managed to post four consecutive quarters of year-over-year revenue growth. And while profits took a hit in fiscal 2011, the company is projecting earnings growth of more than 45% in fiscal 2012!

More interesting to me is the 2011 buyout of Swiss-American medical device maker Synthes for a massive $21.3 billion. Before the deal was announced, JNJ stock was hanging out at around $59 a share. After the deal was announced, the stock spiked 10% in a matter of days.

But continued recall woes have been a distraction, and Wall Street has been focused on changes in the corner office as longtime leader William Weldon will hand the reins over to a former Army Ranger. JNJ is now about 7% off its 52-high attained last summer, and is in the red year-to-date in 2012.

Calling JNJ a turnaround play is a bit of an overstatement, since this company never was at risk of going anywhere. But it’s safe to say that now is a good buying opportunity as the company looks to refocus and win back Wall Street.

And if it doesn’t? Well, the bad news is baked in and the Synthes acquisition is going to naturally inflate numbers in the next few quarters. Look for proof of that when JNJ reports on Tuesday, April 17.

Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the stocks named here.


Article printed from InvestorPlace Media, https://investorplace.com/2012/04/3-crash-proof-dividend-stocks-to-buy-gis-dd-jnj/.

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