The Nasdaq Composite is on track for its eighth straight week of losses as Russia's aggression in Ukraine gives Wall Street another reason for pessimism beyond its macroeconomic concerns over inflation, supply chain issues, and rising interest rates.
Yet even as the tech-heavy Nasdaq falls, Lockheed Martin (LMT 0.75%), United Parcel Service (UPS -0.79%), Chevron (CVX 0.53%), Procter & Gamble (PG 0.25%), and Coca-Cola (KO 0.55%) are all trading near their 52-week highs. These five diverse businesses have an average dividend yield of 3% at today's share prices.
Here's why these five monster dividend stocks are doing well, and why that matters for your portfolio even if you're not interested in owning any of them.
1. Lockheed Martin
Lockheed Martin shares are trading less than 3% below their 52-week high, and less than 15% under the all-time intraday high of $442.53 they set on Feb. 11, 2020.
When the stock market was focused on rapid growth and paradigm-shifting technology, Lockheed Martin was prone to year after year of underperformance. But in a market where value, dividends, and stability are favored, Lockheed is a clear winner.
The business largely runs on stable, multi-year contracts with the U.S. government and its allies. It also has a massive order backlog that can be relied on to bring in many more years of earnings. Lockheed Martin's stable free cash flow supports a sizable dividend that at the current share price yields 2.9%. Periods of geopolitical tension like we're experiencing now drive more intense interest in defense companies like Lockheed Martin. Add it all up, and you have a stock that could very well hit a new all-time high soon, even in a down market.
Unlike Lockheed Martin, which is facing low single-digit percentage or flat growth, or even a potential contraction, United Parcel Service has been on a tear. After posting a record year in 2020, UPS maintained its growth into 2021 and recorded its best year ever, with revenue rising by 11.5% to a record high and its five-year operating margin hitting 13.2%. It also raised its dividend by 49%, the biggest payout boost in company history.
UPS is the industry leader in package delivery and continues to make investments into e-commerce fulfillment to keep up with the growing needs of small and medium-sized businesses. It raised its prices by 5.9% and continues to post record numbers despite supply chain challenges and a labor shortage. In short, UPS is doing well because it has pricing power that can combat inflation and is a well-run business in a growing industry. And at current share prices, its dividend yields 2.9%.
Chevron stock surged to a new all-time high a couple of weeks ago as oil and natural gas prices rose to their highest levels since 2014. And with demand continuing to grow and supply remaining constrained, we could very well see sustained high oil and natural gas prices for the rest of the year.
What separates Chevron from other oil and natural gas companies is its ability to lean into weak markets, and its capacity to support its stable and growing dividend. Chevron bought Noble Energy in 2020 when the oil and natural gas market was on its knees. Given the price it paid for Noble, and where energy prices stand today, the deal looks nothing short of brilliant in hindsight.
Chevron's low average cost of production allows it to achieve breakeven levels even when oil is in the low $40s per barrel. Strong free cash flow and one of the best balance sheets in its peer group help support Chevron's dividend -- which at current share prices yields 4.1%. And, as an S&P 500 component that has raised its payout for at least 25 consecutive years, Chevron is also Dividend Aristocrat.
4. Procter & Gamble
P&G is the largest U.S. consumer staples company by market cap. Its share price is within striking distance of an all-time high because the company continues to post strong organic growth, increase its dividend, and combat inflation well.
Consumer staples businesses are generally recession-resistant because demand for their products tends to be less prone to variations based on economic cycles. However, not all of P&G's peers have been as good at absorbing rising costs or passing them along to customers. Take Clorox for example, which just posted its worst quarterly gross margin in 21 years.
The reason that P&G is near its 52-week high while Clorox is near its 52-week low is that P&G has been -- and forecasts that it will continue to be -- less vulnerable to inflation due to its brand power, pricing power, and an efficient supply chain. P&G is also Dividend King, having raised its annual payouts for 65 straight years. At current share prices, it yields 2.2%.
Coca-Cola stock reached a new all-time high last week, which is remarkable given the broader market sell-off. Like Procter & Gamble, it's a consumer staples company that has done a good job managing inflation and other industry issues.
Lockheed, UPS, Chevron, P&G, and Coke may be very different businesses. But the through-line that connects them all is that they all pay attractive and growing dividends, are profitable, are leaders in their respective industries, and are not trading at expensive valuations.
P&G and Coca-Cola have the highest price-to-earnings (P/E) ratios of the five, while Lockheed, Chevron, and UPS all look like excellent values right now. However, you could argue that P&G and Coke remain great value stocks not because they have low P/E ratios, but because they are high-quality businesses that can continue to perform in poor economic times. They're unlikely to face significant earnings declines or margin compression even if the economy takes a hit for a while. Coca-Cola is also a Dividend King with a current yield of 2.8%.
What it all means for your investments
It's all well and good that these five dividend stocks are beating the market. However, if you don't own them and aren't interested in buying them, you might think that how they perform shouldn't really matter to you as an investor.
But that's not necessarily so.
As individual investors, we are all biased in our views of the market. If you're a value investor or an income investor, you may look at the broader indexes' year-to-date performance and wonder why the market is down as far as it is. But if you're a growth investor, you may look at the performance of stocks like Shopify or Roku that are down over 50% so far in 2022 and wonder why the Nasdaq Composite is only down 13%.
When one recognizes why different companies and sectors can underperform in one year and then outperform in the next, it clarifies the advantages of owning a diversified portfolio. For example, the energy and financial sectors were two of the worst performers on Wall Street in 2020, but they were two of the best performing sectors in 2021. Now, value stocks are back in style while growth stocks are out of favor. Instead of jumping in and out of sectors, the best strategy is to invest in a variety of companies you like and understand across a diverse range of industries and hold onto them for the long term.