Bear markets raise difficult questions. How much lower will stocks fall? When do I buy? How long will this last? Those are some common concerns you'll hear during periods of high volatility.
However, the simplest way to approach a bear market is to determine if a company's business and its balance sheet are strong enough to handle tough times. If the answer is yes, then an investor can have the confidence that the company won't be down for the count during lean years. Here's why United Parcel Service (UPS 0.34%), nVent (NVT -1.38%), and Essential Utilities (WTRG 1.88%) are three dividend stocks that can outlast a prolonged bear market.
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Focus on business fundamentals
Daniel Foelber (UPS): Bear markets are not inherently bad. In fact, they can benefit investors with a longer-term time horizon that have yet to reach their peak earning years.
Sectors that have predictable cash flows and are less resistant to the business cycle (think utilities, consumer staples, and healthcare) tend to be the best-performing sectors in a classic bear market. In this bear market, energy stocks are doing well too, because of supply/demand imbalances and because rising oil and gas prices have been a cause of inflation, not a victim of it.
By contrast, industrial stocks tend to be cyclical in nature and are more exposed to the expansions and contractions of the economy. UPS delivers more packages when business is good and consumer spending is high. But that doesn't mean it can't perform well even during a recession.
UPS is at the top of its game and is forecasting record-high revenue in 2022 and an adjusted operating margin of 13.7%, which would be the highest in over 10 years. UPS has expanded routes and invested in improving efficiency to boost margins, which has gone a long way as costs have gone up. The company continues to rake in plenty of free cash flow to support its $1.52 per share quarterly dividend, which is a hefty 3.4% dividend yield.
UPS gives investors a passive income stream they can count on, and it has tons of upside as global trade and e-commerce grow in the coming years. For investors who are looking for companies they can depend on for the long term, UPS is an easy pick.
Expect long-term earnings and dividend growth from this electrification play
Lee Samaha (nVent): The company is a leading player in electrical connection and protection solutions. Think connection boxes, electrical fastening solutions, and electrical enclosures.
As such, it's a "pick-and-shovel" way to play the trend toward electrification in the economy. Fortunately, that's a compelling one. Whether it's industrial automation, electric vehicle infrastructure, smart buildings and infrastructure, data centers, transmission and distribution networks (not least for renewable energy investment), or telecoms, the economy needs electrification.
That's one of the reasons why, despite a challenging environment for the industrial sector, nVent was able to raise its full-year revenue growth guidance recently. Having started the year forecasting organic growth of 6%-9%, management recently upgraded it to 11%-13% on the back of a robust first quarter. Full-year adjusted earnings per share (EPS) guidance is now forecast to be $2.14-$2.22 compared to prior guidance of $2.10-$2.20.
It's a testament to the strength of the company's underlying end markets, which are likely to be relatively resilient across various outcomes for the economy in the coming years. nVent currently pays a yearly dividend of $0.70 (slightly more than a 2% yield), which is more than three times covered by the EPS forecast above. With analysts expecting double-digit earnings growth over the next few years, I'd expect nVent has a substantial opportunity to increase its dividend in the coming years.
A good place to dip your toes for relief from the market downturn
Scott Levine (Essential Utilities): Evidently, it's not only May flowers that the April showers have brought this year -- it's also some growling bears. And with the markets heading south, plenty of investors are turning their attention to defensive positions to fortify their portfolios. For those finding themselves in this camp, Essential Utilities, with its 2.4% forward dividend yield, is an ideal option -- one that provides security as well as an attractive dividend stream.
Providing water, wastewater, and natural gas services to 5 million customers in 10 states, Essential Utilities is a company that can trace its history back to 1886. Clearly, it's seen its share of bear markets. That's the allure of utility stocks. While people may pinch their pursestrings -- cutting back on streaming services, going out to dinner less, or putting off a major purchase -- the possibility that they'll decide to save money by reducing their water usage is far less likely.
Because the company isn't as sensitive to the possibility of decreased customer spending, investors can believe more confidently that it will succeed in achieving its forecasts. From 2021, when the company reported EPS of $1.67, through 2024, management forecasts EPS rising at a compound annual growth rate of 5% to 7%. In regards to the future of the dividend, management is targeting a payout ratio of 65%, so investors can expect the payout to rise in conjunction with the rising EPS. Skeptics may question whether Essential Utilities can achieve this target, but a look into the company's past performance suggests that it seems reasonable. Over the past 10 years, Essential Utilities has averaged a payout ratio of 65.8%.
