There’s a lot of ways to go about picking recession-proof stocks. Certain industries such as consumer staples, utilities, and health care tend to fare well even during economic downturns.
Other analysts might point to certain statistics, such as high profit margins, low variation of earnings, or a net cash position on a company’s balance sheet.
Those all have their merits in terms of determining a company’s quality and safety. However, for this list, I’ll be using dividend aristocrats as the primary filter. A dividend aristocrat is a company that has increased its dividend payout each and every year for at least the past 25 years.
As of this year, that means that any current dividend aristocrat has increased their dividend annually without fail dating back to 1987. Since then, companies have endured the crash of 1987, the fall of the Soviet Union, the 1990s dot-com bubble, the 9/11 attacks, the 2008 financial crisis and Covid-19. Any company that has run that gauntlet and come out with a steadily increasing stream of earnings and dividends can withstand any mere recession that comes along.
With that in mind, here are seven dividend aristocrats that make for high-quality recession-proof stocks in 2022:
- Aflac (NYSE:AFL)
- 3M Company (NYSE:MMM)
- Brown-Forman (NYSE:BF.A, NYSE:BF.B)
- Colgate-Palmolive (NYSE:CL)
- Hormel Foods (NYSE:HRL)
- Walmart (NYSE:WMT)
- Kimberly-Clark (NYSE:KMB)
Recession-Proof Stocks: Aflac (AFL)
Interest rates are going up. The Federal Reserve hiked its key benchmark interest rate on Wednesday, marking the first rate increase since 2018. The bank signaled that this would hardly be a one-off, either. Rather, the market is currently pricing in roughly eight hikes over the next 12 to 24 months.
This should be pure gravy for an insurer like Aflac. After all, the business model is to collect premiums from customers and invest them. A large part of an insurers’ investments are typically in fixed income securities. These have not been particularly fruitful in recent years with interest rates near zero.
With a Fed funds rate closer to the 2% to 3% range, however, interest rates would lift across the board, allowing Aflac to earn a much higher yield on the income portion of its investment portfolio.
Even as things stand today, with interest rates still at a low level, Aflac stock is trading at just 10x earnings. With the upcoming rise in returns on fixed income products, Aflac’s profits could jump considerably.
AFL stock also offers a reasonable 2.5% dividend yield for its shareholders.
3M Company (MMM)
Industrial conglomerate 3M is most known for its Post-it notes and other adhesive products. However, it’s far more than that.
The company is a big player in the auto parts market, it makes workplace safety products, and it offers a diverse line of goods in the health care industry, among other endeavors. This makes 3M one of the most all-encompassing ways to profit from the American industrial sector.
MMM stock has sold off lately around some legacy legal issues. Once those are cleared up, however, look for MMM stock to stage a swift recovery. In the meantime, shares are trading for just 14x forward earnings and offers a dividend yield of greater than 4%.
Those are strong figures for a company that has hiked its dividend for an incredible 63 years in a row. Out of the American industrial companies, it’s hard to top 3M for consistent growth and income.
Brown-Forman (BF.A) (BF.B)
Brown-Forman is one of the largest American spirits companies. It is primarily known for its Jack Daniels whiskey. It also has a popular franchise in the rapidly-growing field that is tequila.
Alcohol tends to do well during recessions for obvious reasons; people may actually drink more during hard times, in any case, demand doesn’t slip too much. The company is also the best in breed of the spirits companies as it routinely earns the highest profit margins and returns on its investments.
Brown-Forman stock always tends to look expensive on an earnings or free cash flow basis. However, it’s worth the premium, given its impeccable quality and safety. And, as things stand now, shares are near 52-week lows, offering a better value than usual for this rock solid defensive play.
Finally, it’s worth noting that there are two share classes of BF stock. The B shares are more widely traded, and are the ones commonly owned by exchange-traded funds. However, the A shares are cheaper while paying out the same dividend as the B shares.
In addition to that, the A shares have voting rights, whereas the B class does not. Thus, the A shares are superior in all ways except trading liquidity, and thus are the preferred option for long-term holders.
Recession-Proof Stocks: Colgate-Palmolive (CL)
Toothpaste and cleaning products giant Colgate-Palmolive is another reliable consumers staples company. Regardless of what happens with the economy, people need to brush their teeth and clean their homes, after all.
Colgate shares moved up to new all-time highs during the pandemic. That was understandable, as demand temporarily surged. Now, however, things have moved back to normal. Meanwhile, inflation pressures are hitting the bottom line.
CL stock has backed off 15% from the highs given these developments. However, the business should be back to normal in 2023. Analysts see earnings recovering and CL stock is trading at just 20x those projected earnings. That’s not bad at all for a company that makes indispensable products such as toothpaste.
Hormel Foods (HRL)
Hormel Foods is one of the nation’s leading food companies. It specializes in proteins. Hormel has built a wide array of protein-focused brands. It is most famous for its Spam canned meat offering, however that is actually only a small portion of its overall revenues. Hormel is also a leader in bacon, pepperoni, deli meats and other such foods.
In addition, it has taken on a wide variety of non-meat products to appeal to younger consumers. These include guacamole, Mexican salsas, Justin’s nut butters, plant-based meat offerings, and most recently, the acquisition of the Planters nut and snack business.
Hormel has exceeded most of its packaged foods peers in terms of earnings growth and stock performance in recent years. This is largely because Hormel focuses on owning its categories rather than being one of many brands selling a commodity good.
Hormel would rather sell the No. 1 guacamole, canned chili or organic deli meat rather than be one of many makers of a more competitive product like cereal or chips. Hormel’s niche-dominating strategy has led to higher profit margins and has resisted the encroachment of store-brand options.
Hormel is projected to set a new record for earnings this year, and the stock price appears set to follow as the company has overcome the current inflationary wave that has crippled so many of its food industry peers.
Walmart was one of the very few large-cap blue-chip companies that went up during the financial crisis. That’s right, if investors bought WMT stock at the market peak in 2007, they actually made a small profit over the next two years while the rest of the stock market collapsed.
What made Walmart shares a lighthouse during the storm? Simply put, when the economy stumbles, people have to trade down. Instead of going to upscale stores, they shop for value. And few retailers offer more value than Walmart and Sam’s Club.
Meanwhile, Walmart is showing life in the e-commerce game. Back around 2016, WMT stock fell to historically low valuations as investors feared that Amazon (NASDAQ:AMZN) would leave it in the dust. Since then, however, Walmart has fought off Amazon’s grocery store push, and the pandemic gave Walmart the opportunity to show off its improved e-commerce and omnichannel capabilities.
Long story short, Walmart is still the king of delivering everyday low prices, and that’s a feature that never goes out of style during hard times. That’s what makes it one of our recession-proof stocks.
Recession-Proof Stocks: Kimberly-Clark (KMB)
Toilet paper and cleaning products company Kimberly-Clark has had an up and down couple of years. Like Colgate, Kimberly-Clark excelled during the pandemic as toilet paper was briefly a coveted product.
However, that surge in buying activity led to a natural slump the next year as consumers were already stocked up. Throw in the supply chain headaches and a surge in the price of wood pulp, and Kimberly-Clark wasn’t able to keep 2020’s momentum going for long.
The current downturn in earnings and the stock price should lift over the next year, however. At the end of the day, Kimberly-Clark sells absolutely essential products, and the supply chain and inflation issues will be ironed out in due time. Meanwhile, the company is down to 17 times next year’s earnings while offering a nearly 4% dividend yield. That’s a standout offer from this long-running dividend aristocrat.
On the date of publication, Ian Bezek held a long position in HRL, BF.A and MMM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.