Inflation is high, geopolitical tensions rage, and investors are understandably nervous. So after three years of outstanding stock market performance, investors are getting more defensive in 2022.
But that doesn't mean you have to leave the market. Fortunately, there are terrific businesses out there that are mostly immune from war, can weather inflation, and are also returning money to shareholders in the form of growing dividends. Here are three dividend growth stocks to own that will also allow you to sleep very well at night.
Costco
People always need essentials like food, toilet paper, and other home goods, no matter what the economy is doing. Furthermore, a bargain never goes out of style. That's why Costco (COST -0.77%) is a safe-haven stock amid the market's pessimism.
Costco has a rock-solid membership business model that allows it to price its goods and services below any other major retailer, while generating most of its profit from membership fees. Last quarter, Costco's membership revenue of $967 million comprised the majority of its $1.81 billion in operating income, on $50.1 billion in sales.
Stripping out the membership revenue, the remaining operating margin was just 1.65%. You would be hard-pressed to find another retailer than can make it on a 1.65% operating margin. Even Walmart's operating margin was 3.86% last quarter.
Those low prices led Costco to post really strong 14.4% same-store-sales growth last quarter. And revenue could get even better this summer, too. That's because this summer will mark five years since Costco's last membership price increase.
Asked about a fee increase on the last conference call with analysts, CEO Richard Galanti noted that over the past 15 years, Costco has raised the price of its membership about once every five years. The last increase was in June 2017. If there is a membership fee increase, that could lead to even more profit for Costco in the year ahead. And amid rising inflation, it's a good bet that more people will sign up for Costco to get deals on food, electronics, and gas -- all the items experiencing high inflation right now.
While Costco's P/E multiple looks high at over 40 times earnings, it also grew operating earnings 35% last quarter. A fee increase would only supercharge that growth. And though Costco's dividend yield stands at a paltry 0.6%, the company has also paid out special dividends on top of that every few years. The last one was a $10-per-share dividend in December 2020, or a little less than 2% at today's stock price. Given Costco's pace of special dividends, another could be in the offing this year or next year.
These three stocks will pay you a dividend and allow you to sleep well at night. Image source: Getty Images.
Brookfield Infrastructure Partners
Second, Brookfield Infrastructure Corporation (BIPC 3.11%)/ Brookfield Infrastructure Partners (BIP 2.55%) pays a nice 3.1% yield, with the company policy to increase those payments every year between 5% and 9%. Yet over the past 12 years, the company has beaten that mark, raising the payout at a 10% average rate, while funds from operations have compounded at a 15% rate.
Brookfield owns assets spanning utilities, transportation, midstream oil and gas, and data infrastructure, such as cell towers and data centers. The company is also diversified globally, with assets all over the world (but not, notably, in Russia). These are owned assets with low maintenance requirements and long-lived contracted revenues, so the risk is minimal.
Even better, management maintains that an inflationary environment may actually be a tailwind for the company, as more than 70% of revenue comes from contracts with local currency inflation escalators. Furthermore, the company's cost structure is largely fixed, and 90% of its debt is in the form of long-lived fixed-rate debt. Therefore, a lot of the price increases in Brookfield's revenue contracts will flow to the bottom line.
As we've seen with pandemics and wartime, critical infrastructure is quite important, so owning Brookfield Infrastructure is a great way to get some growing income from a low-risk asset that can carry your portfolio through tough times.
Microsoft
Finally, Microsoft (MSFT -1.11%) is just about the least risky large-cap tech stock out there. Even though its stock is down some 16% to start the year, that is after many years of market-beating gains; furthermore, Microsoft is still beating the Nasdaq 100 year-to-date.
I don't expect the stock to stay down for long. Microsoft has a boatload of cash, and its 0.9% dividend is well covered by growing profits, which gives the company room to increase its dividend every year, repurchase stock, and make accretive acquisitions. Most recently, Microsoft offered to make its biggest acquisition ever with a $75 billion all-cash offer for video game company Activision Blizzard. If the deal goes through, it would be a significant boost to Microsoft's growth prospects.
Microsoft gets all that cash mainly from its world-beating enterprise software franchises, its Windows operating system, and its high-growth cloud computing business. Each of its franchises are growing, with high margins, dominant competitive positions, massive scale, and very few competitors.
Because of Microsoft's pervasiveness inside businesses large and small around the world, it also has likely pricing power. For example, I subscribe to the Microsoft 365 Suite, which gives me Word, PowerPoint, Excel, and other essential software for $70 per year. If Microsoft decided to raise the price to $75, would I think about canceling? Probably not.
With its massive global scale and limited competition, Microsoft makes an incredible 44% operating margin, up from the still-impressive low-30% range just five years ago. And that margin expansion is still trending upward.
MSFT EBIT Margin (TTM) data by YCharts
Furthermore, did you know Microsoft's AAA credit rating is even higher than that of the U.S. government? That means debt rating agencies see the company as less of a risk than the government, even with Washington's powers of taxation.
Given that U.S 10-year Treasury bonds yield a little less than 2% and Microsoft's current earnings yield is around 3.3% (trading at 30 times earnings), with those earnings projected to grow in the high teens over the next five years, Microsoft seems awfully safe to me. It's another sleep-at-night stock to own through tumultuous times.
