There is the very real possibility we're going to be mired in an extended period of stagflation. We've had two consecutive quarters of economic contraction, the common yardstick for a recession, and the August inflation print just showed the consumer price index rose to 8.3% when economists were expecting a decline.
In such periods of uncertainty, investors can take comfort in the reliability of dividend stocks to see them through.
The asset managers at Hartford Funds looked at the performance of the benchmark S&P 500 going as far back as 1930, and found that in every decade, dividend-paying stocks generated positive returns. Throughout the Great Depression and the "lost decade" of the 2000s, dividend stocks held up when non-paying stocks declined.
They also found that from 1960 on, dividends represented an astounding 84% of the index's total return and by reinvesting dividends in the benchmark, the power of compounding helped turn a $10,000 investment into more than $4.9 million compared to the $795,823 that money would have become based just on the index's price alone.
Dividends can help soften the blow a falling stock market can have on capital appreciation and the payout serves as a vote of confidence that even in troubled times a company is willing to share its profits with investors. The following pair of dividend stocks also happen to be deeply discounted, allowing patient investors a chance to enjoy lucrative returns in the years ahead.
Tobacco giant Altria (MO 1.33%) hasn't been smoking the market or the competition in 2022 as shares are down 12% year to date. While the S&P 500 might be down 17% this year, the cigarette maker's performance hasn't been stellar.
Much of that was due to the Food and Drug Administration banning Juul Labs' electronic cigarettes from the market. Altria owns a 34% stake in Juul. Although a court ordered the agency to reconsider its decision, the damage has been done. British American Tobacco's Vuse e-cig has grown its market share 39% as Juul's once-dominant brand has collapsed to 29.4%.
Then Philip Morris International announced it would acquire Swedish Match, a direct competitor of Altria in the small but fast-growing nicotine pouch market. The purchase also gives the global tobacco stock direct access to the U.S. market, should it attempt to sell its IQOS heated-tobacco device in the U.S. It had previously used Altria to sell the device, but it was barred from importation because it violated British American's patents.
Still, Altria owns the U.S. cigarette market through its Marlboro brand, which has a near-43% share. And while its investment in Juul precluded it from selling its own e-cigs, because Juul's valuation has all but evaporated Altria is now free to pursue its own e-cig plans. It anticipates submitting applications for its devices to the FDA for approval by the end of the year.
Altria pays a dividend that yields 9% annually, and it has raised the payout every year for more than 50 years, making it a Dividend King. Its stock also goes for just eight times next year's earnings estimates, which, considering its dominance and growth prospects, makes it look like a bargain.
Compared to much of the rest of the casino industry, MGM Resorts International (MGM 3.55%) is riding high, even though its stock is down 24% year to date. Since the onset of the pandemic, MGM has more than quadrupled in value versus much more meager gains by its world-class rivals, Las Vegas Sands (up 53%) and Wynn Resorts (just 6% higher).
MGM was never as exposed to China as were its peers, so with various areas of China still suffering from lockdowns the casino operator continues to do well. Its second-quarter earnings showed revenue surged 44% to $3.3 billion, while net income was $1.8 billion. It generated nearly $1 billion in adjusted earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR), which is a proxy for cash flow from resorts.
That's because Las Vegas continues to shine with revenue doubling year over year while regional casinos also showed strength with a 12% gain. As a so-called "sin stock," MGM Resorts could do well even in a recession since such plays tend to show a resistance to decline. And while lockdowns of the sort that crushed the industry are not expected again, MGM now has an extensive online operation with the No. 1 online casino platform in the country and one of the top sportsbooks.
MGM's dividend isn't going to blow anyone away, yielding just 0.3% annually, but the company has been more aggressive buying back its shares to return value to shareholders, repurchasing some $1.1 billion worth last quarter. The casino operator's business is still strong, and that's without any meaningful input from Macao. Should that region of the gambling world recover, MGM should soar as its far-flung operations finally return to growth.