If you prefer to err on the side of caution when you invest then you probably want to keep your portfolio diversified and focused on dividend paying stocks. Diversification will help soften the blow of bad times and dividends will help keep you invested no matter what comes your way. Three dividend payers that should be on your short list are Royal Gold (RGLD -1.09%), Hormel Foods (HRL 1.00%), and Kimberly-Clark (KMB -0.28%). But it's more than just their dividends that set them apart in the stock market.
Gold? Really?
Precious metals are subject to swift and volatile price swings, it's true. But if you step back and look at those price swings, their highs often occur right when you want them to -- when the broader market is going down. For example, during the 2007 to 2009 recession, gold went up 25% while the S&P fell 36%.
Image source: Getty Images.
I'm not suggesting you load up on gold, but adding a little gold exposure will help to diversify your portfolio in a big way. And that will help you endure the inevitable downturns in the market. One of the best ways to do that is precious metals streaming company Royal Gold.
And what about when times are tough for gold? Well, Royal Gold has proven it can survive those periods, too. The best evidence of this is the company's 16-year history of annual dividend hikes. That period includes a gold rally and, more important for the risk-averse, a gold downturn. So when gold is under pressure, you can look to Royal Gold's dividend to keep you going. The roughly 1.3% yield may not be huge, but the dividend consistency and diversification benefits of owning a gold investment make Royal Gold a great choice for investors looking to keep risk to a minimum.
Where Spam is a good thing
If you're big on safety, how about a company with a 51-year streak of annual dividend increases that sells an iconic food product? That would be Hormel, the maker of Spam, among many other things. For Hormel, you can fall back on the idea that we all need to eat, and Hormel makes food -- but that's not the right way to think about the company.
One of Hormel's strengths is shifting its business around to adjust to market changes. That's the type of thing that's allowed the company to increase earnings in 28 of the last 31 years. That said, Hormel's shares aren't exactly cheap today, but they do appear to be reasonably priced. The P/E of roughly 20 is below the five-year average P/E of nearly 23, but the company's price-to-sales ratio of 1.9 is above its five-year average of 1.5. The yield, meanwhile, is around 2% -- toward the high end of the company's historical range.
Hormel has an enviable track record. Image source: Hormel Foods.
That relatively high yield is because of the changes taking place in the food industry, as consumers shift toward fresh and healthy food over pre-packaged foods. But Hormel is on top of this change, selling assets in recent years to acquire brands like Wholly Guacamole and Muscle Milk. And along the way it's been working on improving its margins, increasing its operating margin from 9.3% in 2011 to 13.9% last year.
It isn't done shifting with the times yet, either, with plans to focus on international growth and a willingness to add leverage to its debt-light balance sheet. Long-term debt stands at about 5% of the capital structure today. Management also has the stated goal of continuing its streak of annual dividend hikes.
If you don't like risk, Hormel has a proven track record of consistent performance. And right now the dividend yield is flashing a solid "buy" signal for long-term investors.
We all do it
The last company on this list is Kimberly-Clark, which makes paper products like toilet paper and diapers. The internet hasn't yet figured out a way to replace our need for these products just yet...and probably never will. It's one reason to like Kimberly-Clark, but it's not the best reason.
Let's start with 45 consecutive years worth of dividend increases. That's a nice record, though not quite as impressive as the streak at Hormel. And then let's consider price, which -- like Hormel -- appears reasonable today. The P/E of 21 is below the five-year average of around 28, but its price-to-sales ratio of 2.5 is above the average of 2. The yield, meanwhile, is basically right around the five-year mean.
And then there's the company's recent performance. Gross margin and operating margin last year were the highest they've been in a decade. That comes as the Kimberly-Clark has been working to turn its business around by jettisoning struggling operations (like diapers in some foreign markets) and focusing on cost-cutting and zeroing in on its best products and regions.
Kimberly-Clark has been focusing on the core. Image source: Kimberly-Clark.
Kimberly-Clark's dividend yield isn't as high as it has been in the past, but the company's long history of annual increases, necessity products, and improving business metrics make it a good option for low-risk investors. And it's hard to complain about a 3% yield when the broader market is only offering up around 2%.
Dealing with risk
Royal Gold is a great option for investors looking to diversify their portfolios in preparation for the inevitable bad times while collecting a growing dividend along the way. Hormel appears to be offering up a relatively high yield from a company that's proven it can change -- profitably -- with consumer tastes. And Kimberly-Clark sells necessities, has a long history of annual dividend hikes, and is successfully improving the fundamentals of its business. Each of these names could have a place in a low-risk investor's portfolio.