3 Dividend Growth Stocks To Own In A Recession

The following is a guest post by Bob Ciura from Sure Dividend. 

In times of market turmoil, opportunities are created for those willing to take a long-term view. We believe the best way to generate passive income that lasts over the long-term, is to find stocks that have long histories of paying (and raising) their dividends through tough economic periods.

To that end, we recommend long-term income investors focus on the Dividend Aristocrats, which we believe are among the highest-quality dividend growth stocks in the entire market. The Dividend Aristocrats are a group of 64 stocks in the S&P 500 Index, with at least 25 consecutive years of annual dividend increases.

Below, we’ve selected three of the best stocks in our coverage universe for dividend growth through what is likely going to be a recessionary period following the COVID-19 outbreak.

Dividend Growth Stock: Johnson & Johnson

The first stock we recommend for investors looking for dividend growth through this difficult period is Johnson & Johnson (JNJ). The healthcare conglomerate derives around half of its revenue from pharmaceuticals, about one-third from medical devices, and the remaining one-sixth from consumer products. We like the company’s wide and deep diversification of products that are non-discretionary, which means revenue streams should hold up nicely during a recession.

Johnson & Johnson generates about $85 billion in annual revenue, and has a current market capitalization of $345 billion.

Johnson & Johnson’s dividend history is outstanding, having raised its payout for a staggering 57 consecutive years. That makes Johnson & Johnson one of just 30 companies on the highly prestigious Dividend Kings list, which are companies with at least 50 consecutive years of dividend increases.

Johnson & Johnson’s dividend growth path should be unaffected by the economic conditions prevailing today from the virus outbreak because of its diversification and high levels of profitability. We forecast earnings will see little to no impact from the virus outbreak given its non-discretionary product portfolio, and thus, its financial flexibility to raise the dividend should be maintained.

We see the payout rising from the current $3.80 per share annually to just over $5 per share in the next five years, congruent with its historical rate of dividend growth in the mid-single-digits.

The company has the ability to do this because the payout ratio is less than 45% of earnings for this year, so even if earnings are reduced, Johnson & Johnson has the flexibility to continue to pay the dividend and raise it each year without fear of overextending itself. For these reasons, we think the stock will hold up well during a recession, and is a strong choice for investors with a long view of investing.

Dividend Growth Stock: McDonald’s

The next stock in our list of three is McDonald’s Corporation (MCD), the global, ubiquitous operator and franchisor of quick-service fast food restaurants. The company’s revenue stream is heavily dependent upon franchise fees collected from the ~95% of its stores around the world that are owned by franchisees, not the company itself.

These fees have very high margins thanks to the company’s model that has very low operating costs, and McDonald’s revenue has generally held up very well during periods of economic distress. We like McDonald’s for a recessionary period because consumers on the margin typically flock to lower cost options for eating out, and McDonald’s is best positioned in the group to reap that benefit. McDonald’s generates around $21 billion in annual revenue and its market capitalization is $123 billion.

McDonald’s also has a tremendously long dividend increase streak, although it isn’t quite as long as that of Johnson & Johnson. Still, the company’s most recent increase was its 43^rd consecutive annual increase of the dividend.

While we concede that McDonald’s will see some negative impact to earnings this year, given that many of its stores around the world remain closed or are restricted to drive-through service only, we expect McDonald’s to continue raising its dividend each year. Earnings-per-share should hold up relatively well, just as they did during the Great Recession of 2008-2009.

In turn, dividend growth should be maintained as well. We expect McDonald’s dividend to rise from the current annual payout of $5 per share to $6.38 in the next five years thanks to its long history of increasing the payout in the mid- to high-single-digits annually.

Dividend safety is also plenty good enough to see the payout through the COVID-19 crisis, as even if earnings-per-share fall all the way to $7 under a bearish scenario, the payout ratio would still be around 70%. Therefore, there is little risk of a dividend cut for McDonald’s.

Dividend Growth Stock: Walmart

The final stock in our list is Walmart (WMT), the largest retailer in the world. We favor Walmart as a standout in the beaten-down retail industry because of its tremendous size and scale, as well as its source of consumer staples that allow its revenue and earnings to hold up well to adverse economic conditions. Indeed, Walmart has already been a major beneficiary of the COVID-19 crisis as consumers stock up on goods in preparation of prolonged stay-at-home orders across the country.

Walmart generates about $535 billion in annual revenue and has a market capitalization of $322 billion. Walmart is also a time-tested dividend growth stock with an impressive 46-year history of dividend increases.

Walmart will likely be a net beneficiary of the COVID-19 crisis. The company has been overwhelmed with store traffic and orders through its digital channels since the crisis began, and we now expect $5.10 in earnings-per-share for this year.

With the payout at $2.16 annually today, the company’s payout ratio is just 42% of projected 2020 adjusted earnings-per-share. That provides a significant margin of safety with the payout, and gives Walmart ample room to continue to raise it during this period. Walmart is uniquely positioned to see benefits from COVID-19, when most companies are scrambling and trying to mitigate the negative impacts.

Final Thoughts

Times of uncertainty can generate significant opportunities for investors that take a long-term view. We think the current situation is favorable for companies with long dividend histories and relatively low payout ratios, along with recession-resistant business models. Such companies should thrive in the coming years, and we like McDonald’s, Walmart, and Johnson & Johnson as dividend growth stocks to own in a recession. These three stocks should continue to generate rising passive income for shareholders for many years.

Please share your thoughts below!