With the stock market now entering its ninth year of an epic bull run, and share prices at all-time highs, many investors are worried that dividend stocks, growth stocks — all stocks! — are trading at highly overvalued levels and set for a market crash.
While corrections are inevitable, at the same time history shows us that market timing is the absolute worst thing you can do. In fact, a recent study found that missing just 10 of the best market days in each of the past nine decades would have reduced one’s profits (owning the S&P 500) from 10,055% to just 38%!
In other words, trying to time the market can cripple your returns.
Long-term, buy-and-hold investing in dividend stocks is a great way to build your wealth and income, whether you want to simply live off dividends in retirement or some other life goal.
While the market’s valuation appears high relative to history, interest rates are also at very low levels — even after the Fed’s recent fed funds rate hike — making dividend stocks more attractive. It’s also true that no matter how high the market gets, something is on sale. Reasonably priced stocks with below average volatility also tend to decline less during market down periods, preserving capital.
Essentially, if you buy fairly priced, high-quality, low-volatility dividend growth stocks, such as dividend aristocrats, you can protect yourself from unpredictable market risk.
To help get you started, here are 10 great, safe dividend stocks to consider for your diversified dividend growth portfolio in the event of a market crash. We used our Dividend Safety Scores to identify many of these candidates. In order of yield …
Safe Dividend Stocks for the Next Market Crash: Expedia (EXPE)
EXPE Dividend Yield: 0.9%
5-year Annual Dividend Growth Rate: 16.6%
Expedia Inc (NASDAQ:EXPE) is the world’s biggest travel agency by bookings, courtesy of its portfolio of travel sites including Expedia (of course), Trivago, Egencia, Travelocity, Orbitz, Homeaway, AirAsia and Hotels.com.
Expedia’s large size (thanks to steadily buying its rivals) provides it with a moat that should help it achieve strong revenue growth. Its successful entry into mobile — now representing 45% of its business — should allow it to successfully stave large rivals such as Priceline Group Inc (NASDAQ:PCLN).
Expedia’s long-term growth potential lies in a recent partnership with China’s Ctrip.com International Ltd (ADR) (NASDAQ:CTRP), that means it should be able to diversify away from its core U.S. business (64% of 2016 bookings) as well as achieve nice margin expansion as it leverages its low fixed costs across its portfolio of businesses.
Meanwhile, while EXPE’s dividend growth record is fairly new (dividend payments started in 2010), the company has proven willing to quickly raise the payout. Better yet, because the free cash flow (FCF) payout ratio is a low 18.4%, not only is the dividend highly secure, but the payout’s growth runway is long and steep. Investors should expect 13% to 14% annual dividend growth over the next decade.
EXPE doesn’t yield much, obviously, but this low-volatility stock is an interesting income candidate for growth-oriented investors — and those seeking a safe harbor from a potential market crash.
Safe Dividend Stocks for the Next Market Crash: Starbucks (SBUX)
SBUX Dividend Yield: 1.8%
5-year Annual Dividend Growth Rate: 24.9%
Over the past year, the world’s largest premium coffee seller has seen its shares remain about flat while the market has soared more than 20%. That’s thanks to concerns about slowing same-store sales as well as the retirement of Starbucks Corporation (NASDAQ:SBUX) founder and CEO Howard Schultz.
However, unlike the last time Schultz retired and was replaced by Jim Donald — who watered down the brand and led to years of stalled growth and falling profitability — this time, investors are left in the capable hands of Kevin Johnson.
Johnson was the COO for the past two years who oversaw the company’s successful expansion into the faster growth of emerging markets such as China, where sales have been growing at a 30% clip.
In fact, Starbucks’ current growth plan calls for doubling its Chinese store count to 5,000 over the next five years, while total store count is expected to grow 12,000 (50%) over that time.
Combined with ongoing margin improvement, courtesy of Starbucks’ increasing use of mobile to shorten the time customers wait at the counter (thus boosting throughput), SBUX could achieve about 10% long-term sales growth and even better earnings growth.
More importantly for dividend lovers, with a low FCF payout ratio of 41%, the Starbucks dividend remains not just safe, but likely to continue growing quickly, at around 17% to 18% per year.
Safe Dividend Stocks for the Next Market Crash: CVS Health (CVS)
CVS Dividend Yield: 2.5%
5-year Annual Dividend Growth Rate: 27.7%
CVS is best known for being the second largest chain of pharmacies, composed of more than 9,600 stores spread out over 49 states, DC, Puerto Rico, and Brazil.
However thanks to the company’s aggressive acquisition of numerous pharmacy benefits managers (PBMs) — which insurance companies pay to design, oversee, run their drug plans, as well as negotiate lower drug prices on their behalf — over the years, it’s also one of America’s largest PBMs.
In fact, today about 60% of CVS’s revenue comes from its PBM business.
Thanks to its massive size (CVS processed 1.3 billion prescriptions in 2016), the company is able to achieve large economies of scale that allow it to negotiate better with drugmakers, and thus improve the value of its PBM service to insurance companies.
In recent months, disappointing earnings guidance — courtesy of increasing competition from major rival Walgreens Boots Alliance Inc (NASDAQ:WBA) — has sent shares crashing nearly 20% in the past year.
However, despite the uncertainty surrounding potential slowing PBM growth (thanks to the potential replacement of Obamacare), this offers long-term investors a unique opportunity. Specifically, income investors can own a very safe (FCF payout ratio 55%) and appealing dividend, which likely will grow at a low double-digit annual rate over the coming years and help to protect you in the event of a market crash.
Safe Dividend Stocks for the Next Market Crash: Hanesbrands (HBI)
HBI Dividend Yield: 3%
3-year Annual Dividend Growth Rate: 44.2%
Famous underwear retailer Hanesbrands Inc. (NYSE:HBI) has fallen victim to the market’s hatred of the retail industry, which has sent shares down about 30% in the past year. However, Hanes has continued to show solid top- and bottom-line growth, with sales up 5% in 2016, and EPS soaring 32%.
And like a few other dividend stocks in the retail sector, Hanesbrands’ difficulties have plumped up the yield.
Thanks to a successful history of acquisitions, as well as supply chain optimization (economies of scale) from its 52 global, low-cost factories, Hanes has been able to grow its earnings and free cash flow per share by 15.8% and 45%, respectively, on an annual basis over the last five years.
Better yet, the company is doing well growing its online sales business, making its distribution network far more agnostic (i.e., Amazon-proof) than many other retailers.
Meanwhile, continued strong growth in its sportswear lines — which make up 50% of its sales — should allow the company to generate around 3% organic sales growth, driving operating income growth of 6% and EPS growth of 7% to 8%, courtesy of steady buybacks.
And with a very low payout ratio (32% of FCF over the past year), HBI should be able to reward dividend lovers with ongoing long-term payout increases of 9% to 10%. That doesn’t account for any potential faster growth through acquisitions that the company may make over the years either.
Safe Dividend Stocks for the Next Market Crash: Williams-Sonoma (WSM)
WSM Dividend Yield: 3.1%
5-year Annual Dividend Growth Rate: 17.2%
Williams-Sonoma, Inc. (NYSE:WSM), the famous home furniture brand that also owns Pottery Barn, has admittedly struggled of late over concerns that Amazon.com, Inc.’s (NASDAQ:AMZN) continued domination of online retailing will crush brick-and-mortar sellers.
But WSM is being thrown out with the bathwater. The internet is no weakness, and in fact, 51% of Williams-Sonoma’s sales are direct-to-consumer online sales.
The company appears to be successfully competing with Amazon and has managed to do so while also growing its profitability.
For example, over the past five years, sales are up 7.3% annually, EPS are up 13% and FCF per share is up 6.6%. Meanwhile, return on invested capital has grown from 16% to 26% thanks to the company’s strong brand, pricing power, and increasingly efficient supply chain.
And as for its online business, the EBIT margins on that are 22% compared to 10% for its in-store sales, meaning that as Williams-Sonoma continues to transition to more online sales, its margins should continue to improve even more. That’s because physical stores represent high fixed costs, and if Williams-Sonoma can sell more while opening fewer stores, its margins will continue to rise.
Of course, the company’s growth runway isn’t just tied to U.S. retail. Growth is made up from a mix of factors, including rising market share, continued strong growth of direct-to-consumer online sales and international expansion, including successful tests in Australia and Mexico.
WSM already deserves a look among other dividend stocks, and investors can expect 9% to 10% long-term payout growth from the company. That’s especially true given the company’s 2016 EPS and FCF/share payout ratios were a low and highly secure 41% and 37%, respectively.
Safe Dividend Stocks for the Next Market Crash: VF Corp (VFC)
VFC Dividend Yield: 3.2%
5-year Annual Dividend Growth Rate: 18.7%
VF Corp (NYSE:VFC) is the badly bruised retailer behind such well-known lifestyle brands as The North Face, Timberland, Vans, Lee, Wrangler and Nautica.
Flat sales in 2016 have the market worried about the company’s ability to grow in the continued age of Amazon. However, keep in mind that one bad year hardly breaks an investment thesis for a venerable dividend aristocrat such as this.
After all, management has spent decades building a collection of more than 30 brands and has a stellar record of acquiring accretive rivals. The company then uses its expertise in global low-cost supply chains and distribution to boost sales, increase margins, and growth free cash flow.
Given that VF Corp has a roughly 26% market share in the fast-growing $46 billion global athletic/casual clothes business, the company’s time-tested growth strategy should allow for long-term sales and EPS growth of 6%, and 9%, respectively. Combined with a moderate FCF payout ratio of just 50%, VFC has potential for 9% to 10% annual dividend growth.
VF Corp has raised dividends for 43 straight years, making it one of the most reliable dividend growth stocks in the market over time.
Safe Dividend Stocks for the Next Market Crash: Teva Pharmaceutical (TEVA)
TEVA Dividend Yield: 4%
5-year Annual Dividend Growth Rate: 8.2%
Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is the world’s largest generic drug maker, thus giving it a great long-term growth runway since over time (as patents expire) more and more of global drug sales are moving in that direction.
And because it’s a pharmaceutical company, one of the most hated sectors right now (driven by uncertainty over changes in federal healthcare policy), Teva’s shares look cheap; down 43% in the past year to yield more than 4%.
Of course that’s also due to a rash of bad news recently, including a failed attempt on the company’s part to extend patents on its multiple sclerosis drug, Copaxone.
Copaxone is the most important product in the company’s specialty drug segment, which contributes $8 billion, or 36% of the company’s sales, but a majority of its profits. Thus the coming generic competition for Copaxone is likely to result in short-term growth headwinds.
Then again, Teva has a great track record of steadily growing through acquisitions — such as Allergan’s (NYSE:AGN) generic drug business — as well as drug innovation. Teva’s drug pipeline has $4 billion a year in annual sales potential. In addition, its vertical integration and economies of scale allow it to convert modest sales growth (3.6% CAGR over the past five years) into strong growth in free cash flow (11.8% CAGR over the past five years).
So even though the medium-term patent expiration cliff it’s facing means that sales are likely to be flat, with long-term sales growth of 2% to 3% CAGR, Teva’s dividend should benefit from several factors. Specifically, rising margins — and 1% to 2% annual share buybacks — could drive EPS growth of 5% to 7%, and with a low FCF payout ratio of 36%, that can easily allow sustainable dividend growth of 6% to 7%.
Safe Dividend Stocks for the Next Market Crash: Simon Property Group (SPG)
SPG Dividend Yield: 4.1%
5-year Annual Dividend Growth Rate: 13.2%
Simon Property Group (NYSE:SPG) is the largest real estate investment trust (REIT) by market cap. The company owns 227 malls totaling 189 million square feet of retail space in North America, Europe and Asia.
And lest you think that malls are going the way of the dodo, the fact is that the high-end, premium properties Simon specializes in are actually doing very well.
In fact, despite Amazon’s seeming relentless butchering of brick and mortar retailers, Simon’s occupancy rate is at a record high 96.3%. And that’s after another year of strong rent increases that sent rent/square foot soaring 10.9% and adjusted funds from operations or AFFO (REIT equivalent of free cash flow) per share up 6.8% for the first nine months of 2016.
Better yet? Thanks to a strong development pipeline of highly profitable (cash yields as high as 10%) investments coming into service in 2017, this year’s AFFO/share is expected to rise by an even stronger 11.6%. For a REIT of this size, that is truly impressive growth.
With one of the strongest balance sheets and lowest AFFO payout ratios in the industry (61%), not just is the generous dividend secure, but it’s also likely to grow at around 7% over the long-term.
So Simon isn’t just one of the better dividend stocks you can own despite being so tethered to retail, but it should hold its own in a market crash.
Safe Dividend Stocks for the Next Market Crash: The Macerich Company (MAC)
MAC Dividend Yield: 4.4%
5-year Annual Dividend Growth Rate: 6.1%
Macerich Co (NYSE:MAC) is America’s third largest mall REIT by market cap, and the same concerns over a shifting retail environment have caused shares to fall 21% over the past year. Part of that is with concerns over specific tenants such as Sears Holdings Corp (NASDAQ:SHLD), which are likely to go bankrupt and require re-leasing of some of its properties.
However, while Macerich may not be a grade-A REIT like Simon, management has been diligently working to recycle capital. Specifically, since 2012 the company has sold $1.5 billion in non-core properties and reinvested the capital, achieving cash yields of 7% to 11%. That’s thanks to an increasing focus on premium malls, especially on the fast-growing coasts, as well as Arizona and Texas.
These investments have allowed the company to steadily improve its occupancy while simultaneously raising rents, resulting in same store net operating income or NOI growth of 5% this year, among the best in the industry.
And while the problems of a few key tenants, such as Sears (which leases 22 locations), will slow growth in 2017 (to NOI growth projected at 3% to 4%), the negative effects of Sears will be offset by $900 million in new investments coming online over the next few years.
In addition, with a low FFO payout ratio of just 63%, the dividend remains highly secure and capable for further growth. In fact, over the long-term this time-tested REIT (founded in 1964) should be able to generate long-term dividend growth of 5% to 6%.
Safe Dividend Stocks for the Next Market Crash: Kimco Realty (KIM)
KIM Dividend Yield: 5%
5-year Annual Dividend Growth Rate: 7.2%
Kimco Realty Corp (NYSE:KIM) is America’s largest neighborhood and community shopping center REIT, with 534 properties representing 86 million square feet of leasable space in 35 states and Puerto Rico.
The company reported same-store NOI growth of 2.8% for 2016, which was dragged down 1.1% by the bankruptcy of Sports Authority. However, this temporary setback has created a buying opportunity.
After all, while that represented a large growth blow to the REIT, Kimco has several key growth catalysts going for it:
- KIM has an enormous growth pipeline of over $3 billion (to be completed by 2020) with expected cash yield returns of 8% to 13%.
- Thanks to more than $1 billion of asset sales in just the past year, Kimco’s portfolio of properties has never been stronger, with a vastly diversified number of stores anchored by strong retailers such as Wal-Mart Stores Inc (NYSE:WMT), Home Depot Inc (NYSE:HD) and Ross Stores, Inc. (NASDAQ:ROST).
- Re-leasing and making improvements to its properties is expected to drive same store NOI growth through 2020 of 4% to 6%.
Meanwhile, Kimco has spent the last six years being very conservative with debt. In fact, its balance sheet is now strong enough to tie it for the second strongest credit rating in its industry (BBB+). Along with more than $1.5 billion in present liquidity, Kimco is well situated to take advantage of its strong medium-term growth potential.
Combined with a low 68% FFO payout ratio, Kimco’s dividend is not just generous, but also secure. Better yet, the company should be able to generate long-term dividend growth of 6% to 7%.
As of this writing, Brian Bollinger did not hold a position in any of the aforementioned securities.