The market is getting anxious after a big 7-year run. US stocks finished their worst week since 2011. Commodity prices are crashing. Interest rates remain near zero around the world. Central banks are stimulating at unprecedented levels. Many emerging markets are already in bear markets. China’s economy is starting to sniffle, which can cause the world to catch a cold.
So what is a long-term minded, fully-invested dividend investor to do? Besides following our top dividend portfolios for the best dividend ideas, it is always important to know your own holdings first.
As we all know, “timing the market” is not a skill or a sustainable strategy. It is speculation, and we don’t recommend trying it.
However, it is advisable to avoid paying extreme premiums for the stocks you do own, especially if they are sensitive to the world economy and are coming off strong multi-year runs.
We believe buying an excellent company (generally defined as a business with high and stable returns on invested capital, a long runway for continued growth, and lower dependence on macro factors) at a moderate premium is acceptable, but these situations can be hard to find.
With last week’s market jitters, we set out to identify a few dividend stocks that performed well during the last recession but don’t appear to have a ridiculously high multiple assigned to them like many other non-cyclical stocks.
In no particular order, the following four dividend stocks could be of interest to you for further research if you are looking to add some stability to your portfolio:
1. GPC: a dividend aristocrat, GPC primarily provides automotive replacement parts. Its sales fell less than 10% in fiscal year 2009, and earnings per share were down about 14%. The company generates free cash flow consistently and has a good balance sheet (last year’s free cash flow would cover its entire net debt). GPC’s trailing 12-month EPS payout ratio is a healthy 51%, and its free cash flow payout ratio is similarly healthy at 47%. GPC yields 2.9% and trades at 18x next year’s EPS estimates. Check out all of its dividend metrics here.
2. PAYX: this dividend stock provides payroll and HR software to businesses, generating nice recurring revenue and business predictability. Annual sales declined 4% during the last recession, and earnings per share only fell 11%. PAYX has also earned a minimum 25% return on invested capital each year over the past decade. The company’s trailing 12-month EPS payout ratio is 84%, and its free cash flow payout ratio is 72%. The balance sheet is solid with no debt and over $500 million in cash. PAYX yields 3.6%. Check out all of its dividend metrics here.
3. JNJ: JNJ has a diversified pharmaceutical business and also provides medical devices and OTC consumer drugs (e.g. Tylenol). Demand is generally non-cyclical for most of JNJ’s products – sales and earnings were down 3% and 4%, respectively, in fiscal year 2009. JNJ also has about $20 billion in net cash on its balance sheet. Its trailing EPS payout ratio is 50% (free cash flow payout is 43%), and the company is a dividend aristocrat. The stock trades at 16x next year’s earnings estimates and yields 3.1%. Check out all of its dividend metrics here and a full analysis of the stock here.
4. MMM: 3M’s operations are nicely diversified by product and geography. Its sales and earnings were only down about 10% in fiscal year 2009, and the company’s return on invested capital hasn’t dipped below 18% over the past decade. The balance sheet looks good, too – MMM’s net debt could be paid off with one year’s worth of free cash flow. MMM’s EPS payout ratio is 49% and its free cash flow payout ratio is 50% – nice safety. The stock trades at about 18x next year’s earnings and yields 2.9%. Check out all of its dividend metrics here and a full analysis of the stock here.
You can analyze each of these dividend stocks and over 2,200 more in one click with our Stock Analyzer tool. All of the key near-term and long-term fundamentals and dividend data are at your fingertips. You can give it a try by clicking here.
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