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3 Dividend Stocks Built to Last a Market Crash

By Daniel Foelber, Scott Levine, and Lee Samaha - May 29, 2021 at 6:00AM

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These reliable businesses have the qualities that income investors look for.

From cryptocurrency to tech stocks, markets have been hit with some swift and brutal downturns as of late. At the same time, the share prices of many value and dividend stocks have been unperturbed. And some have even gone up. However, even the best stocks oftentimes find themselves being dragged down by a broad market crash, which history suggests could happen soon.

With that, we asked some of our contributors which dividend stocks are built to last through the next market crash. They chose Honeywell International (HON 0.55%), nVent Electric (NVT 1.43%), and Parker Hannifin (PH 1.13%).

Three women in hard hats constructing a house at a job site.

Image source: Getty Images.

Using debt without jeopardizing financial health

Daniel Foelber (Honeywell International): Honeywell's 1.7% dividend yield may not strike income investors as anything special. However, top-tier dividend stocks don't always have the highest yields. Instead, they're known for having a track record for raising their payouts, growing the business, and doing it all while maintaining a strong financial position. Over the long term, these qualities are more valuable than a 1% or 2% difference in the yield. And Honeywell has these attributes in spades.

One of Honeywell's most attractive investment characteristics is its consistently strong balance sheet. Going into 2020, Honeywell sported the lowest net total long-term debt of the 10 largest American industrial stocks by market capitalization.

The advantages of a strong financial position were a competitive edge in 2020. Honeywell was able to take on debt without weakening its balance sheet. Its free cash flow (FCF) more than doubled the $2.6 billion needed to cover its dividend, allowing the company to utilize debt to improve the business instead of covering obligations to shareholders. This is all the more impressive considering its aerospace and performance materials and technologies (PMT) business units suffered double-digit revenue declines in 2020. 

Although rising debt levels are usually a red flag, the COVID-19 pandemic was a case where low-interest-rate debt was the best option for many businesses to stay afloat. Unfortunately, many companies were pressured to add debt to already weak balance sheets. In Honeywell's case, the company used debt efficiently and could begin paying it off soon. The company is already seeing its business improve and is guiding for a return to organic sales growth in the second quarter. 

After raising its quarterly dividend to $0.93 in November 2020, Honeywell is likely to raise its dividend again in 2021. The company bought back 4 million shares in the first quarter, part of a $3 billion capital deployment toward dividends, growth capital expenditures, and mergers and acquisitions. With an uptrend in the business cycle under way, Honeywell is poised to shine in 2021.

Underappreciated value

Lee Samaha (nVent Electric): Trading on less than 16 times its one-year trailing free cash flow and with a very well-covered dividend, nVent is an attractive stock for value investors and dividend hunters alike.

NVT Price to Free Cash Flow Chart

Data by YCharts

nVent is one of those companies that offers an indispensable product but is not well known among retail investors. Management classifies the company as providing electrical "connection and protection" products. This boils down to electrical enclosures, thermal management products, and electrical and fastening solutions. Key end markets include the industrial sector, commercial and residential buildings, and infrastructure (particularly data and telecom centers).

As such, nVent plays on the increasing electrification of the economy at large, whether it comes from industrial automation, smart infrastructure, connected buildings, data centers, e-mobility charging, or the like. Electrification implies cabling, and cabling requires enclosures and thermal management; it's as simple as that.

Moreover, all of the industries mentioned above have so-called secular growth prospects. In other words, they are not so much being driven by economic growth but rather by the increased adoption of new technologies. That's something that should give nVent some resiliency in an economic slowdown.

Currently sporting a 2.2% dividend yield and with plenty of growth potential, nVent is a worthy dividend stock.

This regal dividend stock can help you cope with a market crash

Scott Levine (Parker Hannifin): Tracing its history back to 1909, when the company's founder, Art Parker, received his first patent, Parker Hannifin has grown into an industrials stalwart. With a market cap of nearly $40 billion, Parker specializes in motion technologies that span a wide range of applications including hydraulics, pneumatics, electromechanical, and filtration. Because Parker's customers cover a wide swath of industries, the company is able to mitigate the risk of an individual industry experiencing a downturn -- such as the recent dip in the aerospace industry due to COVID-19.

But it's not only the company's success in becoming an industry leader that warrants recognition in investors' eyes -- it's the company's steadfast dedication to rewarding shareholders through its dividend. For 63 consecutive years, Parker has increased its payout to shareholders, placing the company among the group of Dividend Kings.

If you're new to investing, you probably haven't weathered a market crash before. But if you've been around long enough, you know that market crashes are inevitable, occurring, on average, every couple of years. While it's impossible to know what the future holds, the fact that Parker has consistently raised its dividend during numerous market crashes in the past suggests that it's fairly likely it will continue to do so when future dips occur.

While management's track record of hiking the dividend may grab investors' attention, it's the company's strong financials that make the company a compelling option. For one, Parker generates a massive amount of cash. In 2020, for example, the company reported a record $2.1 billion in operating cash flow. And not much has changed so far in 2021; through the first three quarters of fiscal 2021, Parker has reported more than $1.8 billion in cash from operations -- a year-over-year increase of 46%. The company's dedication to improving its financial health is another green flag. Including the $426 million in debt that it paid down in the third quarter of 2021, Parker has shored up its balance sheet by reducing its debt by $3.2 billion over the past 17 months.

PH Dividend Chart

PH Dividend data by YCharts.

For dividend-savvy investors, it's not only a cash flow and debt reduction that signal the worthiness of a dividend stock; it's also important to assess the dividend in the context of the company's overall financial health by checking in with the payout ratio. In Parker's case, there's nothing to fret about. On a trailing-12-month basis, Parker's payout ratio is 29.9%, while over the past 10 years, its annual payout ratio is an average of 30.4%.

Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha owns shares of Honeywell International. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Honeywell International Inc. Stock Quote
Honeywell International Inc.
$199.59 (0.55%) $1.08
Parker-Hannifin Corporation Stock Quote
Parker-Hannifin Corporation
$305.67 (1.13%) $3.41
nVent Electric plc Stock Quote
nVent Electric plc
$36.20 (1.43%) $0.51

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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