According to Dow Jones Market Data, the S&P 500 fell 21% in the first half of 2022. The decline represents the worst first-half performance in a calendar year since 1970.
Many individual stocks are down far more than 21% as the bear market has been particularly painful for growth stock investors. Watsco (WSO -1.25%), Lockheed Martin (LMT 1.71%), and Brookfield Renewable (BEPC 0.81%) (BEP 0.92%) are three dividend stocks that can outlast a prolonged bear market. Here's what makes each a great buy now.
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A business model that relies on recurring revenue
Lee Samaha (Watsco): If we are heading toward a long-running bear market, it makes sense to start looking for income-producing stocks with businesses with stable end markets. That's where heating, ventilation, air conditioning, and refrigeration (HVACR) parts distributor Watsco comes in. If you have HVACR equipment in your home or office, then you will be used to the need to service it. A service contractor is called, and when they need parts and supplies to fix the HVACR unit, they order them from Watsco.
It's not a glamorous business, but that doesn't mean Watsco can't grow earnings significantly in the future. Backed by the surety of underlying demand -- HVACR equipment will need servicing -- Watsco has a growth opportunity via geographic expansion and through rolling out digital technology to contractors.
The geographic expansion comes from acquiring smaller distributors within a highly fragmented market. In fact, Watsco has significantly expanded its business over the years through a buy-and-build strategy. The benefits are that the smaller distributors it acquires tend to operate in strong positions within local geographies.
Meanwhile, Watsco's position as the leader in a fragmented market means it has the financial firepower to offer digital platforms to contractors (an e-commerce facility to make ordering easier) to gain a competitive edge. Currently sporting a 3.7% dividend yield, Watsco is a good option for income-seeking investors.
Low growth, but reliable
Daniel Foelber (Lockheed Martin): When it comes to pure-play defense contractors, Lockheed Martin continues to be best-in-breed. The company is known for its aeronautics division, which includes its flagship F-35 fighter jet. But aeronautics makes up less than half of Lockheed's revenue.
The company has a blend of legacy programs (like the Black Hawk and C-130 transport aircraft programs) but it also makes support systems, software, missile systems, satellites, and is leading hypersonic development programs. In short, Lockheed positions itself to win defense contracts in a variety of categories whereas most of its competitors either don't compete in several defense categories or have other business units outside of defense. For example, Boeing has its commercial aircraft business. And defense is merely one of several business units for Honeywell.
Lockheed's concentration in the defense industry has its pros and cons. In economic contractions, this position protects Lockheed from the cyclical nature of the industrial sector. But in times of economic growth, Lockheed stock tends to underperform companies that have more upside. This dynamic was put on display over the last few years, during which Lockheed Martin stock drastically underperformed the industrial sector and the S&P 500 before beating the market so far this year. In fact, Lockheed shares climbed around 20% in the first half of the year, making it one of the best-performing members of the S&P 500 outside of the energy sector.
Lockheed Martin deserves a place in the portfolios of investors looking for a strong dividend stock at a reasonable valuation whose performance is relatively insulated from the broader economy. With 20 consecutive years of dividend increases and a yield of 2.6%, Lockheed Martin looks like a good dividend stock to consider now.
Watching this top dog in clean energy? You're barking up the right tree
Scott Levine (Brookfield Renewable): If you're like other investors, you're probably feeling powerless with the onset of the recent bear market. On the contrary, you have plenty of power. While you can't send your holdings back to their previous heights, you can fortify them with a formidable dividend stock. A smart move to make now, therefore, is to consider Brookfield Renewable, a renewable energy stalwart, and its 3.6% forward dividend yield to power up your portfolio.
Whereas oil and gas dividend stocks are strongly correlated with the rise and fall of energy prices, Brookfield Renewable is not subject to similar ups and downs. The company secures long-term power purchase agreements (PPAs) with customers, allowing it to lock in steady cash flows for years. In fact, the average term of its PPAs is about 14 years. This is advantageous because it provides management with clear foresight into future cash flows, enabling it to plan appropriately for future capital expenditures -- including dividends.
To better put in perspective how Brookfield Renewable's management is committed to returning green to shareholders thanks to its green energy production, consider its past performance. From 2013 to 2022, Brookfield Renewable increased its dividend at a compound annual growth rate of 6%. Looking ahead, management seems dedicated to providing consistently higher distributions to shareholders as well, targeting annual dividend growth -- for an unspecified time period -- of 5% to 9%.
