So far, the stock market has seemingly shrugged off fears of default if the United States debt ceiling is not raised. But intelligent investors may want to play it safe.
Because as the debt ceiling negotiations continue, investors may become nervous, resulting in market volatility. When faced with market uncertainty, playing it safe and investing in quality is wise. So it makes sense to listen to an investing legend about stock quality. Quoting Peter Lynch, “This is one of the keys to successful investing: focus on the companies, not on the stocks.”
Below are 4 quality companies and dividend stocks to play defense in case of unexpected market behavior. Some dividend stocks tend to have lower volatility when the market faces uncertainty, providing peace of mind.
Portfolio Insight has 9,000+ stocks and ETFs in its database. You can get access up to dozens of metrics, 20-years of financial data from S&P Global, and our Dividend Quality Grade.
The Portfolio Insight platform gives users access to portfolio management, charting, screening and ranking, investment news, SEC fillings, stock analyses, etc. Try it free for 14-days.
4 Dividend Stocks to Play Defense
McDonald’s Corporation (MCD) is the largest quick-service restaurant chain in the world. Consumers know it as a place for fast, consistent food. The company owns or franchises 40,000+ restaurants globally. It sells burgers, chicken sandwiches and nuggets, french fries, sodas, shakes, coffee, etc., to billions annually. The firm is the market leader by far, with $23,183 million in revenue in 2022 and $23,415 million in the past twelve months.
Despite periodic negative press about unhealthy meals, the firm continues to grow over time. Moreover, the firm has expanded in the face of relentless competition in a business with no barriers to entry. But McDonald’s future revenue growth will come from expanding locations, adding menu items, and price increases.
McDonald’s success has allowed it to return cash to shareholders. The stock is a Dividend Aristocrat with 48 years of increases. The forward dividend yield is 2.1%, with a 5-year growth rate of 8%. Moreover, the payout ratio is only 56%, giving confidence about the dividend safety and future growth. In addition, it receives a dividend quality grade of B+.
The stock is not volatile, with a 5-year beta of 0.63. Additionally, consumers purchase the company’s food and drinks in good times and bad. McDonald’s is probably priced near fair value, but investors may want to track this stock for a good entry point.
California Water Service Group
Water is an essential service for consumers and businesses. Hence, water stocks are solid conservative investments because of their regulated nature and monopolies. A primary player in San Jose, California, is the California Water Service Group (CWT). Besides northern California, the firm operates in Hawaii, New Mexico, Washington, and Texas, giving the utility national scale.
Organic growth and bolt-on acquisitions have resulted in the continued growth of water and wastewater connections. The firm has roughly 496,400 customer connections in California, 6,200 in Hawaii, 37,500 in Washington, 10,700 in New Mexico, and 2,200 in Texas. California Water serves about two million people.
California Water is a Dividend King, one of three water utilities on the list. The dividend growth streak is 56 years. The 5-year dividend growth rate is around 6.8%. The forward yield is 1.88%, more than the past 5-year average. The utility also receives an A+ dividend safety score.
Water stocks tend to trade at a high price-to-earnings ratio, and California Water is no exception. The P/E ratio (FWD) is ~29X, but the value is below the 5-year and 10-year ranges. Furthermore, the beta value is low at 0.48. Hence, we view this stock as a buy now.
A quintessential dividend stock to play defense is Colgate-Palmolive, the producer of oral, personal care, home care, and pet nutrition products. The over 200-year-old firm is the global market leader in toothpaste, with a ~40% market share. Besides Colgate, the company’s other brands include Ajax, Palmolive, Tom’s of Maine, Speed Stick, Softsoap, Sanex, Filorga, etc. Total revenue reached $17,967 million in 2022 and $18,338 million in the past twelve months.
Growth drivers are brand extensions to increase market share and periodic tuck-in acquisitions. The firm acquired Filorga and Hello in 2019 and 2020. New brands benefit from Colgate’s marketing and distribution scale and cost efficiencies. The combination has allowed Colgate-Palmolive to attain high gross and operating margins.
Colgate-Palmolive is another Dividend King with 60 years of increases in a row. However, dividend growth has slowed to the low-single-digits because the firm operates in mature markets, and the payout ratio is near 62%. The forward dividend yield is 2.45% supported by a dividend quality grade of an ‘A.’
The stock usually trades at an elevated P/E ratio because of its consistent performance and defensive characteristics. Consumers need toothpaste and other items regardless of economic conditions. However, Colgate-Palmolive trades at a valuation near the bottom of its 5-year range, and the beta is only 0.49. Consequently, we view Colgate-Palmolive as a buy.
Related Article About Colgate-Palmolive on Dividend Power
The last dividend stock on our list to play defense is Costco Wholesale (COST), the giant warehouse retailer. Costco is known for its enormous, no-frills warehouses selling large quantities of electronics, groceries, personal and household care products, clothing, gasoline, and more. Despite selling less items in fewer stores, the company’s business model has allowed it to reach $226,954 million in sales in 2022 and $234,390 million in the trailing twelve months.
Costco will probably add to the total sales by opening new stores in new geographic areas in the United States and internationally. The retailer makes its profits mainly on membership fees that are increased every few years. Customers obviously like Costco’s offerings and way of selling because renewal rates are 90%+.
In addition, Costco is a dividend growth stock with 19 years of increases, making it a Dividend Contender. The growth rate is typically between 10% and 13% per year. The firm has many more years of increases ahead of it because of the modest ~26% payout ratio. However, the dividend yield is low at only 0.83%.
Inflationary headwinds in 2022 and 2023 have pushed the stock price down from its all-time high. As a result, it is trading at a P/E ratio of ~34X, below its 5-year range, but still high. Nevertheless, with a beta of about 0.79 and an A+ dividend quality score, investors may want to buy this high-quality retailer.
Disclosure: Long MCD, CL, COST
A version of this post by Dividend Power originally appeared on Investor Place and was republished with permission.
Related Articles on Dividend Power
Here are my recommendations:
- Simply Investing Report & Analysis Platform or the Course can teach you how to invest in stocks. Try it free for 14 days.
- Sure Dividend Newsletter is an excellent resource for DIY dividend growth investors and retirees. Try it free for 7 days.
- Stock Rover is the leading investment research platform with all the fundamental metrics, screens, and analysis tools you need. Try it free for 14 days.
- Portfolio Insight is the newest and most complete portfolio management tool with built-in stock screeners. Try it free for 14 days.
Receive a free e-book, “Become a Better Investor: 5 Fundamental Metrics to Know!” Join thousands of other readers !
*This post contains affiliate links meaning that I earn a commission for any purchases that you make at the Affiliates website through these links. This will not incur additional costs for you. Please read my disclosure for more information.
Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.