4 Rock Solid Dividend Stocks for Uncertain Times

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There is plenty of geopolitical and economic uncertainty present in the middle term. The military conflict in Syria is getting more complicated by the day and the situation in Egypt is far from reaching a stable equilibrium. If that weren´t enough, monetary policy in the US, decelerating growth in China and long-term structural problems in Europe can add some serious volatility on the economic front.

These are just a few examples about well-know risk factors to consider. The unavoidable truth is that we live in a world full of uncertainty where almost anything could happen, and some bad things will inevitably happen sooner or later. Considering this, it`s understandable to feel concerned about how different scenarios may affect your portfolio. After all, if you don`t take care of your financial future and the well being of your beloved ones, nobody else will.

Just remember that trying to time the markets on a short-term basis is a loser´s game, especially when making investment decisions based on emotions like fear. On the contrary, keeping your head cool and focusing on the long term is one of the most powerful strategies an investor can follow in order to maximize portfolio returns.

Still, if you are one of those people who believe in hoping for the best but preparing for the worst, here are three rock-solid dividend plays that are strong enough to protect your portfolio under the most terrifying scenarios.

Procter & Gamble
Procter & Gamble
(NYSE: PG  ) owns a huge portfolio of leading brands, 25 of which generate more than $1 billion in annual global sales, some of those names include Head & Shoulders, Pantene, Gillette, Oral-B, Ariel and Pampers among many others. The company has operations in more than 180 countries and it sells everyday necessities, which provides reliability and stability to its cash flows under fluctuating economic conditions. 

Procter is working on reigniting growth and increasing profitability lately, management has launched an initiative to reduce $10 billion in expenses over the next five years, while at the same time accelerated product innovation and focus in emerging markets.

This global powerhouse has paid regular dividends for 123 years, and it has raised those payments over the last 57 consecutive years. Procter & Gamble carries a 3.1% dividend yield and has a dividend payout ratio below 60% of earnings. The company increased its dividends by 7% this year, which seems like a sustainable dividend growth rate for such a stable and mature corporation.

(NYSE: KMB  ) manufactures basic consumer products like diapers, tissues, feminine-care products and toilet paper among others. The company claims that nearly a quarter of the world's population in more than 175 countries uses its products on a daily basis. With brands such as Kleenex, Scott, Huggies, Pull-Ups, Kotex and Depend, Kimberly-Clark holding No. 1 or No. 2 share positions in more than 80 countries.  

The company is moving away from its less profitable business lines; management has decided to exit the bulk of its Western and Central European diaper business as well as some of its lower-margin consumer tissue operations. In terms of growth opportunities, Kimberly-Clark is betting on Latin America where rising income levels bode well for the company. 

Kimberly-Clark has raised its dividend payments in each of the last 41 years, and the stock is currently paying a 3.4% dividend yield.The dividend payout ratio is in the area of 65%, not excessive but not leaving a lot much upside either. Kimberly-Clark increased its dividends by an impressive 9.5% in 2013, but investors should probably expect more moderate increases in the future as dividend growth converges toward a slower growth rate in earnings and cash flows. 

Johnson & Johnson
Johnson & Johnson
(NYSE: JNJ  ) is a global giant benefiting from its leadership position in multiple areas and wide diversification across different business segments. The medical devices and diagnostics, pharmaceuticals and consumer products segments represent 41%, 38% and 21% of total revenues, respectively. Johnson & Johnson makes approximately 70% of its revenues from No. 1 or No. 2 global leadership positions in its respective markets.  

Like every company in the health care business, Johnson & Johnson faces risks coming from regulatory factors and patent expirations. Furthermore, product recalls have been a problem for the company lately. On the other hand, an aging baby boomer generation is providing strong secular tailwinds for Johnson & Johnson, and the company has the fundamental strength to capitalize the opportunities that will emerge in the long term.

Johnson & Johnson yields 3% in dividends, and the company has increased its payments over the last 51 consecutive years. The payout ratio is quite comfortable at less than 55% and Johnson & Johnson increased its dividends by a sustainable 8.2% in 2013.

(NYSE: KO  ) won the cola wars against PepsiCo (NYSE: PEP  ) back in 2010 when Diet Coke took over the second position from Pepsi, giving Coca-Cola both the first and second place in the U.S. market with regular Coke and Diet Coke respectively. The company owns the most valuable brand in the world according to Interbrand, and its gigantic global distribution network provides a formidable competitive advantage versus smaller players in the industry. 

Coke has been facing stagnant volume growth due to healthier consumer habits, especially in developed markets. But the company is expanding into healthier choices with products like Dasani water, Minute Maid juices and Powerade sports drinks in order to adapt to the new trend, and emerging markets still offer room for volume expansion due to rising income levels.

PepsiCo, which still owns an undisputed leadership position in the global snacks market through its Frito-Lay division, is following a similar strategy by promoting its Good-For-You portfolio consisting of a combination of tasty and nutritious products like its Tropicana, Quaker and Gatorade brands.

Coca-Cola and PepsiCo are among the most popular choices in the dividend investing community, and for solid reasons. While Pepsi has raised dividends in the last 41 consecutive years, Coke has an even longer track record of 51 consecutive years. Both companies pay similar yields in the area of 2.8% for Pepsi and 2.9% for Coke, but Pepsi has a lower payout ratio around 50% versus 55% for Coke. When it comes to dividend growth, Coke is ahead of Pepsi, though, in 2013 the company increased its dividend by 10% in 2013 versus a 6% increase for PepsiCo.

Both companies deserve their place among the most respected dividend names, but I would choose Coke over Pepsi due to its unquestionable leadership in drinks and remarkable competitive strengths.

Bottom line
The future is plagued with uncertainty; it always has been and always will be. But that doesn´t mean investors should try to avoid volatility by jumping in and out of the market based on their emotions. In case you are feeling concerned about what the future holds, or if you simply believe in buying companies with rock-solid competitive positions and an immaculate track record of dividend increases, these three indestructible stocks may be attractive alternatives for your portfolio.

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  • Report this Comment On September 10, 2013, at 5:17 PM, PEStudent wrote:

    I wish these analyses would also include companies with steady earnings and revenue growth. You can NOT simply say, "The dividend's been raised for 57 straight years, so it will keep increasing - and at 7% like this year!"

    PG's earnings have not been steady since the 2008 crash. Consequently the dividend payout ratio (percent of profits paid as the dividend) from 2008 through 2013 (calendar year ended 6/30) is:

    40%, 46%, 51%, 50%, 68%, and 59%.

    The stock price reached $75.18 in 2007 and only recovered and surpassed it in 2013, and it's $77.87 now.

    Yes, it's a Warren Buffett's Berkshire holding, but he's gradually sold half his PG shares and last October 24th told CNBC: “What goes on inside the place, what mistakes have been made, what the plans are, I don’t know the answers on that. The jury’s out on that now, because they have disappointed in terms of earnings and we’ll see what happens."

    That's not so "rock solid" to me in terms of growth, but with it's Long Term Debt a low 20% of capitalization - half of what it was a decade ago, and a stable Return on Equity, it's not in danger of a serious decline.

    Today's price is at a P/E of 20.2 and S&P Reports projects future prices in the P/E range of 17.8- 18.4 - around 10% below the current price.

    S&P's "fair value" calculation - giving it a 20% premium above the S&P 500 avg. P/E. is $69. TREFIS more generously values it a $74.02.

    Experts expect a generous 8% avg. annual growth in earnings over the next 5 years, based a lot on PG's claim it will cut costs $10B. It has a strong stock repurchase program ($5-$7B expected in FY 2014) that's been average $5B per year but has only reduced outstanding shares by about 0.3% per year.

    Averaging the "fair value" at $71.51 and allowing for the 8% growth and expecting the $2.4006 annual dividend to be reinvested and to increase 7% per year, in 5 years each $77.87 you spent now would be worth $119.91 in PG stock.

    That's the equivalent of an average 9.0% return over the 5 year period - a nice return for a "stalwart stock.

    Part of the problem, of course, is that it's actual earnings growth has been slightly negative the last five years and artificial methods (MORE cost cutting and tens of billions in share buybacks) are required to turn that number into 8% growth.

    The last 3 years revenues are: $82.6B, $83.7B, $84.6B, and S&P projects $86.0B, a 2.3% jump for the next year - though it would be 4.0% if it didn't think currency translation would cost it.

    If eps did grow at 5% per year, the $77.87 investment would grow to $105.26 in 5 years, or an avg. annual return of 6.2%. Not great, not likely average, but not awful.

    If the stock dropped to, say $74, those 6.2% to 9.0% return calculations rise to $7.3% to 10.1%.

    On the other hand, if you don't have the entire amount you'd like to invest now, you could dollar-cost-average a $250/month or more investment with NO purchase fees.

    PG is one of the few super-blue chips that has a no-purchase fee DRIP (administered by Where most others have $50-$100 minimum purchases, PG's $250. Still not a bad way to go don't have $1000 or more that you'd like to invest but you can contribute $250 per month until you hit your purchase level - you can even set up an automatic investment taken from your checking account on the 1st or 15th of the month - or both of at least $250 each time. You gain the dollar-cost-average advantage of getting more shares if the price drops and buying fewer shares if it goes up.

    Because of the DRIP, and dollar cost averaging, I'm actually considering PG at $77. Right now, it does NOT look great based on Ben Graham's "The Intelligent Investor" or Mary Buffett's "Buffettology."

    But first, I've just begun reading Greenwald et al's classic "Value Investing." I'm going to wait until I'm done and see how PG compares.

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