Will we or won’t we have a recession? That’s the question that is troubling some investors. When recession fears hit, many investors retreat to the relative safety of dividend stocks. These stocks offer the benefit of modest capital growth and regular dividend payments.
For income investors, this can be a timely source of cash for regular expenses. For investors who don’t need the income, many dividends can be reinvested to provide the benefit of compounding.
But not all dividend stocks are the same. One mistake that some investors make is to chase a high yield. But that company that is paying a 5% dividend (or higher) today may not be able to sustain a dividend at that level.
The two questions investors need to ask regarding the safety of their dividend are: How likely is the company to sustain the dividend? And are they likely to increase it?
In this way, investors can use many of the same research tools they would use when evaluating a stock for growth. Fundamentals can tell an important story. For this reason, many of the safest dividend stocks are located in defensive sectors. These are sectors that perform well regardless of economic conditions. The products that these companies manufacture are considered consumer staples. The consistent revenue stream makes the dividend extremely safe. And in some cases, these companies are part of the elite Dividend Aristocrat club, which means they have increased their dividend for at least 25 straight years.
So let’s get to it. Here are three consumer stocks that pay safe dividends.
Consumer Dividend Stocks: Kimberly-Clark (KMB)
Dividend Yield: 3.1%
Year-to-Date Gain: 15.4%
We lead off with Kimberly Clark (NYSE:KMB). I said in the introduction that consumer stocks focus on consumer staples. There are very few products that exemplify the category of staple products more than diapers, toilet paper and other hygiene products. And KMB is the owner of well-known brand names that garner customer loyalty, such as Huggies, Kleenex and Depends.
In addition to being sold in over 175 countries, company data cites that 1 in 4 consumers use at least one of their products every day.
On Aug. 1, the company declared their most recent quarterly dividend of $1.03 per share. The dividend was paid on Oct. 2, 2019 to shareholders of record on Sept. 6, 2019.
The company has now paid a dividend to shareholders for 85 consecutive years. It was also the 46th consecutive year that Kimberly-Clark increased its dividend payment.
In addition to the safe and growing dividend, Kimberly-Clark stock is benefiting from the company’s aggressive restructuring plan that has boosted sales to a three-year high. Falling commodity prices are further helping the company’s margins and boosting profits.
General Mills (GIS)
Dividend Yield: 3.7%
Year-to-Date Gain: 33.4%
General Mills (NYSE:GIS) stock is not behaving like a traditional dividend stock. It’s up a whopping 33% in 2019. Now, in fairness, that is still significantly below its high of around $72 per share in 2016. This has led some, including InvestorPlace contributor Will Healy, to express some skepticism about the ability of GIS to increase its dividend, which it has done for 15 straight years.
I have a more bullish outlook. The company is the parent of iconic brands such as Cheerios, Cinnamon Toast Crunch and Yoplait. While these may not have the cache or large margins of some of the more trendy organic products, they have the advantage of being recognizable and most importantly popular.
Whether or not the economy is headed for a recession, there are signs of contraction. And while consumers won’t stop buying food, they may start squeezing their budget at the edges. And that puts GIS brands front and center.
Plus, even if General Mills fails to increase their dividend, they have paid a dividend in one form or another for 120 consecutive years. That’s income that investors can count on.
Flowers Foods (FLO)
Dividend Yield: 3.6%
Year-to-Date Gain: 11.5%
When it comes to Flowers Foods (NYSE:FLO) stock, it’s helpful to remember that the more things change, the more they stay the same. Despite changing dietary habits, including low-carbohydrate diets, the company’s staple products of packaged bakery foods remain in steady demand. The company’s brand portfolio includes names such as Nature’s Own multigrain breads, Tastykake snacks and Wonder bread.
FLO stock is easily outpacing the S&P 500 in 2019. And in May, the company announced it was raising its quarterly dividend by 5.6% to 19 cents per share. Even with the increase, the company still has a comfortable payout ratio at around 70% of earnings.
There is some concern about the long-term growth of the dividend. FLO is showing declining earnings of slightly more than 5% over the last five years. This is a bit of a concern should the economy show further deterioration. However, the company is still paying the dividend out of profits and cash flow so, unless earnings drop precipitously, it looks quite safe.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.