Experienced investors know that it's almost impossible to time stock market crashes with a high level of consistency. The good news is that there are steps you can take to fortify your portfolio before trouble hits.
With that in mind, we put together a panel of Motley Fool contributors and asked each participant to profile a high-yield dividend stock that has defensive characteristics and growth opportunities that should help it survive and thrive through the next crash. Read on to see why they think that these three stocks can help you prosper through volatility and crush the market.
Growth trends to power through the next crash
Keith Noonan: Broadcom (AVGO -0.70%) provides wireless connectivity chips used by Apple and other mobile hardware producers, and it's also a rising player in the infrastructure and security software markets. The stock pays a dividend yielding roughly 2.9%, and the company is trading at roughly 17.5 times this year's expected earnings.
Broadcom appears to be in the early stages of benefiting from some major new growth cycles, and the company's reasonable valuation should help its stock stand up against volatility if a crash hits in the near future. If shares take a beating amid a broader market sell-off, investors can at least look forward to an elevated dividend yield. Broadcom has also been crushing it on the dividend-growth front, raising its annual payout roughly 606% over the last five years, and it appears to be in good shape to deliver more big dividend increases.
The 5G upgrade cycle and rising infrastructure and cybersecurity demands may help Broadcom put up strong results even if the broader market goes through a rough patch. Factors including potential economic downturns and geopolitical issues still present risks for the company and the semiconductor industry at large, but leading players in the connectivity chip and infrastructure software spaces may be able to power through a bearish turn for the broader market thanks to rising demand tailwinds.
Just as it's difficult to predict when exactly a crash will happen, it's also hard to predict what will be the cause of the crash. Some industries will inevitably be hit harder than others whenever the next big sell-off comes, and investors may be able to position themselves for the next market meltdown if they back strong players in industries that will still have growth trends at their backs. Broadcom already trades at non-prohibitive levels and boasts a great dividend profile, and the company's strong positioning across multiple categories makes the stock a worthwhile pick for income-focused investors seeking a combination of value and growth potential.
This easy-to-miss -- and safe -- company makes the cloud work
Jason Hall: When thinking about cloud services, e-commerce, SaaS, cybersecurity, or the other hyper-connectivity trends, investors often focus on the companies that are front and center of those trends, many of which have been very big winners.
There have also been plenty of losers, and disruption is a reality in the constantly evolving world of companies that live in the cloud. For investors looking for more stable, less volatile, and even lower-risk investments, that's made it harder to find winners. For dividend investors, the pickings get even slimmer.
This is where Digital Realty Trust (DLR 0.25%) comes in. The power of the cloud is that it's available anywhere there's an internet connection. But the cloud has to live somewhere, and the closer it is to users, the better and the more reliable the experience. Digital Realty is one of the largest data center providers on earth, serving more than 4,000 customers in two dozen countries and almost 50 of the largest metropolitan centers on earth. Simply put, Digital Realty is where the cloud -- and big data -- lives.
Since going public in 2004, Digital Realty has crushed the market:
I think that market-beating streak is likely to continue. With a long record of steady double-digit growth in funds from operations across multiple economic downturns and market crashes, Digital Realty is a stock you'll want to own through any stock market crash.
Multiple compression shouldn't affect Verizon
Jamal Carnette: The impacts of stock crashes are not equally dispersed. When investors perceive increased risk, it leads to lower multiples: the price paid per dollar of earnings and/or cash flow.
High-growth stocks that trade at extreme valuations tend to bear the brunt of sell-offs while companies with stable cash flows and cheap valuations hold up relatively well. For that reason, Verizon is a stock you want to own during market crashes.
Verizon (VZ 0.26%) stock has significantly lagged the greater market, but that's the opportunity as the company is one of the cheaper stocks in the S&P 500. Verizon shares trade hands at 10.5 times forward earnings, less than half the 22.4 times multiple for the S&P 500.
In the event of a crash, Verizon's multiples will experience less compression than the overall market. Additionally, Verizon's shares yield 4.5%, nearly three times the yield of the greater market. When shares drop, the dividend yield rises, which will attract more income investors as bond yields are minimal.
Yet it's unlikely a decline in economic activity will significantly impact Verizon's operations. Its core businesses of wireless telephony and internet are now considered essential for most households. These subscription-based services power Verizon's cash machine, and the company generated more than $20 billion in free cash flow last year.
Like all stocks, Verizon has risks. The company has exposure to the long-declining cable television and wireline telephone industries. As a result, full-year revenue was lower than each of the two years prior in 2020. Additionally, Verizon has a large debt pile that could pressure earnings and cash flow if revenue continues to drop.
That said, management is doing a good job managing the effects of the declining legacy business and continues to keep cash flow high. The company paid $10 billion in dividends last year, giving a cash flow margin of safety of 50%. Because revenue growth has been difficult for the company, it's understandable Verizon would trade at a discount to the greater market. But the level appears extreme at this point, which could be its strength in a market crash.