For the past month and a half, investors have been reminded of the so-called "price of admission" to the greatest wealth creator in the world.
Following a record-long 11-year bull market, the spread of the coronavirus disease 2019 (COVID-19) wound up pushing equities into the quickest (and steepest) bear market decline of all time. At the trough, the benchmark S&P 500 wound up losing 34% of its value in a mere 33 calendar days.
In short, it's been a challenging time to be an investor.
Safe dividend stocks are your ticket to thriving during the coronavirus crash
But at the same time, it's encouraging to note that each and every bear market in history has proved to be an incredible buying opportunity. Although it can sometimes take years to completely recover from a bear market, every stock market correction, no matter how steep or protracted, has been completely erased by a bull-market rally. As long as investors hold their high-quality businesses for an extended period of time, they tend to make money.
Of course, not all stocks are created equally. As a 2013 report from J.P. Morgan Asset Management showed, dividend stocks absolutely have an edge over non-dividend-paying stocks. Publicly traded companies that initiated and grew their payout between 1972 and 2012 returned an average of 9.5% annually over this four-decade stretch. By comparison, non-dividend-paying stocks average a mere 1.6% annual return between 1972 and 2012.
The big question is: Which dividend stocks should you buy during the coronavirus crash?
Considering that we recently hit an all-time high reading for stock market volatility, it might makes sense to buy three of the absolute safest dividend stocks in the world.
Johnson & Johnson
There are a lot of ways to define "safe," but one of my favorite ways is to pick out one of the only two publicly traded companies to bear the highest credit rating Standard & Poor's bestows (AAA). Back in the 1980s, there were a few dozen AAA-rated companies. Today, only two -- and healthcare conglomerate Johnson & Johnson (NYSE:JNJ) is one of them. This means Standard & Poor's has more faith in J&J paying back its debts than it does of the U.S. federal government doing so (the U.S. government has a AA credit rating).
One factor that makes Johnson & Johnson such a success is simply that it's in the healthcare sector. While healthcare stocks are often viewed as high growth and prone to disruption during recessions, the fact is that people don't get to choose when they get sick or what ailment(s) they develop. This creates a pretty steady stream of demand for pharmaceuticals, medical devices, and healthcare products.
Johnson & Johnson's three operating segments also each play a key role in the company's growth. For instance, consumer health products is the slowest-growing segment, but it provides steady cash flow and strong pricing power. Meanwhile, the medical device segment is a long-term play on an aging U.S. and global population. Lastly, pharmaceuticals provide the bulk of J&J's growth and margins, but are limited by patent exclusivity.
All told, Johnson & Johnson has raised its dividend for 57 consecutive years and is currently paying out a healthy 2.7% yield.
You know what else is safe? The only other company aside from J&J to be given the highly coveted AAA credit rating from Standard & Poor's: Microsoft (NASDAQ:MSFT). It's certainly not hard to understand why, as Microsoft ended the most recent quarter with around $134 billion in cash and cash equivalents --- $57 billon in net cash after debt -- and has generated a whopping $54.1 billion in operating cash flow over the trailing 12 months.
For Microsoft, its growth has been dependent on legacy dominance and innovation. In terms of the former, even though we've witnessed enterprises moving their data into the cloud, Microsoft's Windows operating system continues to absolutely dominate in personal computers and laptops. The exceptionally high margins and pricing power associated with Windows, and more recently with Office 365 Commercial, have been responsible for generating a consistently large sum of cash flow for Microsoft.
On the innovation front, all eyes are on Microsoft's cloud offerings, and more specifically Azure. Constant currency sales for Microsoft's enterprise cloud offering rose 64% year-over-year in the fiscal second quarter, ended Dec. 31, 2019. Even Windows cloud services delivered 27% year-on-year growth.
Although Microsoft isn't a Dividend Aristocrat like Johnson & Johnson, its payout has essentially quadrupled over the past decade. That's good enough for a 1.2% yield, which isn't too bad for a mega-cap growing at a double-digit percentage rate each year.
Another exceptionally safe dividend stock is technology kingpin Apple (NASDAQ:AAPL). It may not have a AAA credit rating from Standard & Poor's, but it might as well considering that it had $107.2 billion in cash and cash equivalents at the end of its most recent quarter (about $9.6 billion in net debt), and had generated an eye-popping $73.2 billion in operating cash flow over the trailing year with a profit margin of more than 21%.
What makes Apple tick, you ask? It's first and foremost the company's iPhone, which according to GlobalStats was garnering approximately 60% of mobile vendor market share in the U.S. in March 2020. Apple has what can be described as a cult-like following for its iPhone, and we should see this translate into exceptionally strong sales growth once the company unveils its first 5G-capable smartphone.
The other factor that makes Apple great is its innovation. CEO Tim Cook has made it a point to move Apple beyond just a products company. While consumers are still highly attached to Apple products and the brand, the next phase of long-term growth for Apple is in wearables and services. And it just so happens that these segments have been growing much faster than iPhone, iPad and Mac sales in recent quarters.
Like Microsoft, Apple isn't a Dividend Aristocrat. But similar to its fellow tech mega-cap, Apple has grown its payout considerably in recent years. Since recommencing its dividend in 2012, following a 17-year absence, Apple's annual payout has grown by 103%, with a current yield of 1.2%.