Dividend investors tend to prefer stocks with stable business platforms. In fact, many investors will flock to strong dividend payers when the market, as a whole, starts to look fragile. Strong dividends, plus resistance to a weak economy, equals a safe port in any storm.
We asked three of our top contributors to share their best dividend ideas for times when the economy is weak or unpredictable. They came up with Oaktree Capital (NYSE:OAK), Wal-Mart Stores (NYSE:WMT), and McDonald's (NYSE:MCD). Read on to see why these three tickers are particularly well suited for income investors during difficult markets.
A winner in cost-conscious environments
Keith Noonan (McDonald's): Selecting stocks that will perform well during a market crash is a tricky proposition because it often relies on using past performance to predict future results, and the conditions that contribute to economic downturns are variable. With that caveat out of the way, it's possible to look for businesses that have characteristics that put them in positions to continue running at a high level when finances tighten, and McDonald's looks to be one such company. The fast-food giant's focus on delivering value-focused food and beverage offerings suggests that its model will continue to function, and perhaps even benefit, if consumer spending habits tighten.
While overall spending on going out to eat can be expected to decline during a recessionary period, it's not as though people will stop going out, or getting food on the run entirely, and the company's inexpensive food and drink options put The Golden Arches in position to attract a more cost-conscious public. These qualities helped McDonald's grow sales during the last recession, and its resilience propelled the company's stock up roughly 42% from 2007 to 2009, while the S&P 500 lost 36% over the same stretch.
Again, these results don't guarantee that Mickey D's will outperform the market during the next market crash, but it's not hard to imagine that worsening economic conditions could see the company soak up coffee business from Starbucks, or win back customers who have drifted to fast-casual chains.
With a 2.5% yield and a 40-year history of delivering annual payout increases, McDonald's looks like a solid stock for weathering a potential market downturn.
The retailer that loves penny-pinching consumers
Anders Bylund (Wal-Mart Stores): When the economy is going down the tubes, consumers tend to flock to low-cost solutions for everyday problems. That's why the king of discount retail shopping is more or less immune to market crashes.
Wal-Mart Stores did just fine in the 2008 panic, for example. Starting from the prices seen at the beginning of 2008, the S&P 500 market tracker plunged more than 50% over the next 15 months, while Wal-Mart stayed afloat. Five years later, when the overall market had recovered to its early 2008 levels, Sam Walton's retail empire had marched on to 42% gains:
During the same period, Wal-Mart also increased its annual sales by 22% along a smooth growth curve. Free cash flows raced 165% higher. Oh, and its dividend kept rising every year to the tune of a 67% five-year boost. Dividend yields rose to the highest levels in the company's history, and then kept on increasing when the economic pressure lifted.
Walmart is sensitive to changes in the economy, but often completely backwards compared to higher-priced retailers. This is the dividend stock I would choose if I saw dark clouds gathering on the economic horizon. Wal-Mart takes a kicking and keeps on trucking.
A counter-cyclical asset manager
Jordan Wathen (Oaktree Capital Group): Few financial companies get better as the world turns for the worse, but Oaktree Capital Group isn't your average financial stock. The mostly distressed-debt fund manager profits from panics, deploying billions of dollars in distressed assets to collect handsome incentive fees as markets recover.
Owners of Oaktree Capital Group own more than just its eponymous asset management firm. The company has cash in excess of debt, fees it has earned but yet to receive in cash, and a stake in fixed-income manager Doubleline that I collectively value at about $22 per share.
Backing these assets out of Oaktree's recent trading price of $46 per share, Oaktree's actual money-management operation only has to be worth about $24 per share. I think the operating businesses are worth about $32 per share, for a grand total of $54.
The consensus view seems to be pricing in a world where Oaktree has little opportunity to deploy all the funds it has raised into distressed opportunities. With just over $100 billion in assets under management (AUM), about $21 billion is "shadow AUM" that hasn't been deployed. Every year that the calendar turns without a significant downturn is a year in which its forward earnings power declines.
Of course, markets don't go up in a nearly straight line forever. The only question is when Oaktree can put its clients' assets to work. I think it'll happen sooner rather than later, and its current 6% yield makes it an attractive stock to own.