A severe market crash will bring nearly every stock down with it, but some stocks are more resilient than others. When it comes to dividend stocks, the ability to maintain a dividend payment when the sky appears to be falling is an asset dividend investors should seek out.
We asked three of our contributors to each discuss a dividend stock that should be able to withstand a market crash far better than the average stock. Here's why Costco (NASDAQ:COST), American Water Works (NYSE:AWK), and Omega Healthcare Investors (NYSE:OHI) are good bets for when the market turns south.
The most consistent retailer
Tim Green (Costco): Warehouse club Costco doesn't offer the highest dividend yield, but the company's consistency allowed it to weather the last great market crash with relative ease. The stock still slumped in 2008 along with the rest of the market, but it recovered quickly and has now more than doubled from its previous high.
Costco is able to offer lower prices than traditional retailers by selling a smaller selection of items in bulk. Its vast warehouse stores require less labor than a typical discount store, and the company spends essentially nothing on advertising. All of these savings are passed on to its customers, which are happy to pay an annual membership fee for access to unbeatable prices.
This membership model is what drives Costco's consistency. The company doesn't need to constantly convince shoppers to step foot in its stores. Instead, consistently low prices and great customer service compel customers to make the trip, as well as renew their memberships. E-commerce is a lingering threat to the Costco model, but so far, it hasn't made a dent. The next time the market crashes, Costco should hold up far better than other retailers.
Provide an essential product & make a decent profit
Tyler Crowe (American Water Works): When it comes to dividend stocks you can depend upon, you'll be hard-pressed to find a company better suited for market crashes than American Water Works. Like other utilities, water utilities are highly regulated businesses that more or less operate without competition in a municipality. Also, unlike electric power utilities that can fluctuate with the price of fossil fuels, water, by comparison, is a much more consistent cost for utilities. What's more, basic services such as drinking water and wastewater are the types of things that rarely see large fluctuations in demand based on the economic environment. This means American Water Works can more or less anticipate a consistent revenue stream.
American Water Works has taken the inherent advantages of being a water utility and translated them into a dividend machine for its investors. Aside from a seven-year period when it was owned by German electric utility RWE from 2001-2008, the company has a reputation for having raised its dividend annually for more than 30 years. Over the past four years, the company has been able to grow its payout 10% annually, in part because of its geographic presence. American Water Works has operations in more than 16 states nationwide. That larger footprint makes smaller, bolt-on acquisitions -- the only real way to grow the business -- much easier to incorporate into the entire company. These acquisitions, coupled with regulated rates of return on capital spending for maintenance and system upgrades, are the primary sources of earnings growth for the company.
American Water Works stock isn't exactly cheap. Shares currently trade at an enterprise value to EBITDA ratio of 13.1 times. The reasons for such a premium valuation are the company's revenue source being resistant to market crashes and its reliable dividend payment. If those qualities are of great value to you, then American Water Works should be on your radar.
A better way to invest in real estate
Cory Renauer (Omega Healthcare Investors): While real estate may have been at the heart of America's most recent market crash, this real estate investment trust (REIT) helped its shareholders emerge from the great recession with a smile. In late 2008, the stock temporarily fell about 25%, but it fully recovered by the end of 2009. More importantly, it didn't miss a dividend payment.
In fact, Omega Healthcare Investors actually raised its payout by 42.3% during the four-year period between the beginnings of 2007 and 2011, and the stock notched a 26.5% gain. You can almost hear Omega's chart laughing at the benchmark SPDR S&P 500 ETF, which fell 11.5% over the same period.
Omega Healthcare's commendable performance during the latest market crash can be attributed to two key factors. First, it simply collects rent from businesses that operate long-term care and skilled nursing facilities across the country. This means its tenants merely need to continue paying their bills, not necessarily thrive, for Omega to keep paying its dividend. Also, the number of Americans in need of the sort of facilities Omega owns is growing fast. About 10,000 baby boomers turn 65 every day, and they're living much longer than previous generations.
These two factors helped Omega Healthcare weather the great recession without a scratch -- and raise its dividend during each of the past 19 quarters. At recent prices, the $0.63 quarterly payment offers a big 7.4% yield that you can reasonably expect to continue growing quarter after stress-free quarter.
Cory Renauer owns shares of Omega Healthcare Investors. Timothy Green has no position in any stocks mentioned. Tyler Crowe owns shares of Costco Wholesale. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
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