Investors are facing an interesting conundrum — they must balance potential growth with an increasing litany of concerns. So far, earnings have been not so bad. The vast bulk of stocks in the S&P 500 have beat estimates. And with that, stocks have continued to hit record highs. On the other hand, however, the overall economic condition of the nation is murky at best. We’ve seen decreasing data, lowered earnings guidance and plenty of volatility.
It seems that investors may be pricing too much growth into stocks today. Those hoping that the gains could continue throughout the end of the year and into next maybe mistaken. The so-called Santa Claus rally may never come. That certainly was the case last year around this time.
This is why dividend stocks could be best way to play the uncertainty.
Offering steady earnings, cash flows and a guaranteed cash return, dividend stocks are one of the top choices in order to navigate challenging markets. It’s here that investors can stay invested and ride out any potential storms.
But not any old equity income player will do. It takes a certain set of dividend stocks that have quality attributes to get the job done. Which ones fit the bill? Here are five dividend stocks that will help you get through the potential market malaise.
Dividend Yield: 2%
We all know the duck, but we really should get to know the parent firm behind the quack. That’s because Aflac (NYSE:AFL) is dividend stock royalty.
AFL underwrites so-called voluntary supplemental health and life insurance products. These are its famous “be hurt and get paid” policies. Aflac is the leader of this niche and the beauty is that these sorts of policies are generally high margin. That’s important because it provides plenty of “float” for AFL to play with. Float is basically the pool of money waiting to be handed out as claims to insured individuals. It’s here that Aflac can invest this pool, and the interest it generates, to make even more money. The combination of strong underwriting profits as well as net investment gains have propelled the firm over its history.
This continues today. As of the end of last quarter, AFL had total investments and cash of $139.5 billion. Meanwhile, adjusted earnings per share jumped more than 9% during the last three months.
And the duck could quack louder in the future. Aflac has continued to transition into even higher-margin products and is leaning heavily on its sales staff to boost revenues. This has only added to the firm’s dividend potential.
The duck has been paying increasing dividends for 36 years — including the 4% increase at the start of the year. With a low payout ratio, conservative management and new moves to boost revenues further, more dividend growth is in store.
All in all, Aflac could be just the dividend stock to hold through the next few quarters.
Illinois Tool Works (ITW)
Dividend Yield: 2.4%
Just like when we create a portfolio, a business can benefit from diversification. When one piece is going through some trouble, another can step up to the plate and knock it out of the park. When it comes to diversification of product, no one has industrial giant Illinois Tool Works (NYSE:ITW) beat.
ITW makes a ton of different things. This includes everything from commercial-grade ovens for restaurants and those zippers inside food packaging to more advanced testing equipment and even those chips now found inside your credit card. It’s a huge catalog that spans a ton of different industries and sectors. This has been very important throughout ITW’s history. The scope and diversification has worked well and has allowed the firm to weather plenty of economic storms through its history.
It’s streak of over 50 years’ worth of constant dividend growth is a testament to that.
The best part is that Illinois Tool Works continue to see growth. Thanks to its recent strategic moves, the firm has boosted margins and reduced costs better than many of its rivals. With some asset sales planned and other tech investments scheduled for this year, ITW should be able to keep the margins growing further. This will only help drive earnings and keep its pace of dividend growth going far into the future.
Meanwhile, the stock remains cheap given its estimated three-year earnings per share growth of 7.7%. Add in its current 2.4% yield and you have a great buy for the upcoming year.
Dividend Yield: 1.8%
Finding dividend stocks among the retailers is rare, but Walmart (NYSE:WMT) truly is in a league of its own. The low-cost leader is a wonderful play for a variety of reasons. The obvious reason is that people are drawn into the firm’s cheaper prices during bad times. So, any future economic hiccups will have the firm gathering more customers. But Walmart is quickly becoming an e-commerce behemoth as well.
Leveraging its huge store footprint and new mobile ordering offer, WMT has continued to see its star shine in the world of e-commerce. That includes taking market share from its chief online rival Amazon (NASDAQ:AMZN). According to the retail analytic firm First Insight, the frequency of people buying items on AMZN six times or more per month has dropped to just 40% this year. That’s down from 80% in 2017. Moreover, for the first time, a majority of consumers in the survey said that they prefer to shop at Walmart versus Amazon.
This helps underscore that WMT’s investments in omni-channel retailing are working. People love to shop in store, online and in-between.
With that, Walmart is an interesting investment proposition. There’s plenty of growth potential from rising online sales. Meanwhile, its defensive nature provides plenty of security for the rough months ahead. This should show up in the firm’s dividend. Like clockwork, WMT has continued to raise its payout year in and year out since 1974.
WMT stock could offer the best blend of attributes — safety, growth and dividends — for investors’ portfolios.
Dividend Yield: 1.4%
MKC is unique in that it sells flavorings, spices and other sauces. These are items that are used to make meals. As a result, the firm continues to benefit from the shift towards eating real food rather than pre-packaged meals. Overall sales have continued to growth — with management targeting 4%-6% revenue growth this year. The beauty for McCormick is that it isn’t just providing sales to the home market. The firm remains a big player in the commercial and restaurant market as well. This should help the growth keep going as takeout food orders have also increased.
Meanwhile, margins from spices are pretty high — especially when compares to other food items like cereal or pasta.
The combination of steadily rising sales and high margins has made MKC an earnings machine. Last quarter, adjusted earnings per share jumped more than 14% year-over-year along with shifts in takeout and home cooking. This prompted management to once again up its earnings estimates for the year. All of this has made McCormick a dividend and buyback machine as well.
With its entrenched niche that’s benefiting on several fronts, MKC stock could be a great quality dividend play for rougher waters ahead.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
Dividend Yield: 2%
For those investors looking for a one-and-done solution to own quality dividend stocks, the ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL) could be a wonderful choice. The secret to NOBL’s success and its continued outperformance of the S&P 500 over full market cycles is in its sauce.
NOBL tracks a basket of very special dividend stocks. These are firms that have managed to grow their dividend payouts every year for at least the last 25 years. However, the vast bulk of the exchange-traded fund’s holdings have actually done that for at least 40 years or more. This is the exact kind of consistency that we are talking about. Only firms with strong economic moats, low debts and hefty cash flows can keep paying dividends throughout recessions and downturns. That’s what you get with NOBL. Top holdings include Genuine Parts (NYSE:GPC) and Becton, Dickinson (NYSE:BDX).
The proof is in the pudding. Since the S&P 500 Dividend Aristocrats Index — NOBL’s tracking index — was launched back in 2005, it’s managed to crush the bread-and-butter S&P 500. And since NOBL has launched, it’s managed to perform on par with the index. The kicker is that NOBL has been far less volatile and provided a smoother ride. Given the market’s potential for insanity at the end of the year, this is what investors be seeking.
With expenses of just 0.35% or $35 per $10,000 invested, NOBL is a cheap and easy choice to add great dividend stocks to a portfolio.
At time of writing, Aaron Levitt held a long position in AMZN stock.