Dividend stocks usually aren't exciting investments, especially in bull markets that favor high-growth stocks. But when the bear bites, dividend stocks can become great safe havens for riding out the storm.
I generally pick dividend stocks based on a few simple criteria. The company should generate stable growth with a wide moat, it should regularly raise its dividend, its payout ratios should remain below 100%, and it should trade at reasonable valuations. As rising bond yields spark a rotation from growth stocks to value stocks, it's also preferable for a stock's yield to stay above the 10-year Treasury's current yield of about 1.7%.
Let's examine three stocks that check all those boxes: Clorox (CLX -0.10%), McDonald's (MCD 1.70%), and PepsiCo (PEP 1.18%).
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1. Clorox
Clorox is often considered a slow-growth consumer staples company, but its stock price has still risen about 50% over the past five years. After factoring in reinvested dividends, it generated a total return of nearly 70%.
Clorox has raised its dividend annually for 43 straight years, making it a Dividend Aristocrat, a distinction given to S&P 500 companies that have increased their dividend payout annually for at least 25 consecutive years. It currently pays a forward dividend yield of 2.4%, and it spent just 40% of its free cash flow (FCF) on that payout over the past 12 months.
Clorox became a favorite defensive stock during the pandemic as sales of its namesake bleach and other cleaning products surged. But it also generated reliable growth prior to the crisis, steadily growing its annual revenue from $5.53 billion in fiscal 2010 to $6.72 billion in fiscal 2020.
Wall Street expects Clorox's revenue to rise 12% in fiscal 2021, which ends this June, as its earnings increase 14%. Its growth will likely decelerate in fiscal 2022 as the pandemic passes, but Clorox's resilience through previous peaks and troughs indicates it will remain a sound long-term investment. The stock also isn't expensive as it currently trades at 23 times forward earnings.
2. McDonald's
Over the past five years, McDonald's stock price has risen more than 80% and generated a total return of over 100%. The fast-food giant has raised its dividend annually for 44 straight years, pays a forward yield of 2.2%, and spent just over 80% of its FCF on those payments over the past 12 months.
Image source: Getty Images.
The Golden Arches faced intense competition from faster-growing rivals and softer demand from health-conscious diners over the past decade, and its annual sales fell from $24.08 billion in fiscal 2010 to $19.21 billion in fiscal 2020.
However, a large portion of those declines can be attributed to its overseas divestments and a rising mix of franchised restaurants, which generate lower revenues but more stable profits. McDonald's franchisees now operate 93% of all its restaurants.
That strategic shift generated fresh cash for McDonald's to renovate its restaurants, streamline its ordering process with kiosks and apps, and develop new menu items to stay competitive in its core U.S. market.
McDonald's revenue and earnings plunged last year as it closed its restaurants during the pandemic. But this year, analysts expect its revenue and earnings to rise 15% and 39%, respectively, as the crisis ends. The stock is reasonably valued at 25 times forward earnings, and it should remain an evergreen investment for the foreseeable future.
3. PepsiCo
PepsiCo's stock price has risen nearly 40% over the past five years, and it's generated a total return of almost 60%. It pays a forward yield of 2.9%, and it spent 86% of its FCF on that dividend over the past 12 months. It's raised its payout annually for 48 straight years. If it crosses the half-century mark, it will be gain the additional distinction of being a Dividend King.
PepsiCo might initially seem like a risky investment since soda consumption rates have been dropping for decades in developed markets. However, PepsiCo has diversified its beverage portfolio beyond sodas with bottled water, teas, fruit juices, sports drinks, and other non-carbonated drinks, and it's refreshed its flagship sodas with lower-calorie versions, new flavors, and other variations.
PepsiCo also owns Frito-Lay and Quaker Foods, which makes it a more diversified packaged foods play than Coca-Cola. PepsiCo's revenue rose from $57.84 billion in fiscal 2010 to $70.37 billion in fiscal 2020, and much of that growth can be attributed to Indra Nooyi, who led the company from 2006 to 2018 and revamped many of its core products for health-conscious consumers.
PepsiCo's sales continued to rise last year, as its stable retail sales offset weaker demand from restaurants and other businesses during the pandemic. Analysts expect its revenue and earnings to rise 7% and 9%, respectively, this year, and its stock trades at a reasonable 22 times forward earnings.
