The new inflation numbers that just dropped don't bode well for the economy. Although the Dow Jones Industrial Average has managed to pull itself out of bear market territory, all indicators seemingly still point to a recession, one that could be especially taxing on consumers.
Economist Nouriel Roubini, who was dubbed Dr. Doom for his accurate forecast of the 2008 financial market crash, recently wrote, "There is ample reason to believe the next recession will be marked by a severe stagflationary debt crisis."
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Stagflation, a period of economic decline coupled with high inflation, means investors need an "all-weather" strategy to survive, which is why many turn to dividend-paying stocks for their certainty and stability.
The asset managers at Hartford Funds found the performance of dividend-paying stocks in the S&P 500 index going back to 1930 contributed 41% to the index's total return; even better, there was not a single decade during which income-generating stocks did not outperform non-dividend stocks. They never had a decade with negative returns -- something non-payers can't say.
To find some of the best dividend stocks, I like to scour the list of Dividend Aristocrats, companies that are in the S&P 500 and have increased their payouts for at least 25 consecutive years. They've been through many market cycles and have come out on top. It's why Caterpillar (CAT 0.83%) might be one dividend stock you want to put on your radar.
Image source: Caterpillar.
A strong record of payouts
Founded in 1925, heavy equipment manufacturer Caterpillar has been around for a long time, first as a farm equipment company, and later for road construction and infrastructure. Today Cat, as it's known, is also in energy, mining, building, and forestry.
Caterpillar has paid a dividend to its shareholders from the very start; beginning in 1993, it has raised the payout every year for 29 consecutive years. The $4.80 per-share dividend yields a very respectable 2.6% annually, and with a payout ratio of just 38%, the dividend is safe and has plenty of room for future growth. It's a way for investors to minimize any lack of capital appreciation that could occur and is, in fact, happening now.
Caterpillar's stock, down 11% so far in 2022, is doing better than the broader market as a whole but the drop is still a reflection of the weakening economy both here and abroad, where it derives half of its revenue. Let's see why an investor might still want to invest.
Commanding a leadership position
Global supply-chain snarls are an ongoing problem, which is leading more countries to perform essential work domestically. That's a benefit to Caterpillar, which will sell more of the necessary equipment to businesses, and these increasing sales are already showing up in its financial statements.
In the second quarter, Caterpillar produced double-digit growth with revenue up 11% year over year even as retail sales declined 3%. These numbers indicate that Caterpillar is able to raise prices to offset the impact of inflation, its own rising costs, and the effects of currency-exchange fluctuations.
Even so, it is still seeing robust demand in most of its end markets with a firm backlog of $28.5 billion, up $2 billion over the first quarter, that should keep its sales growing well beyond this year.
A long-term opportunity
Although Caterpillar is a global company with exposure to a diverse mix of industries, all of them tend to go through boom and bust cycles, making the company's performance cyclical as well. That means when the markets turn against it, its stock's fall can be sharp, but Wall Street continues to look for growth.
Analysts have a consensus price target of $218 a share, implying 19% upside for the next year but with a high of $280 per share and a low of $147. While an investor could try to time the market, a better strategy is to always be adding money, so that even if there is a downturn, you're still generating income from the dividend and buying shares at an even greater discount to produce better returns over the long haul.
Caterpillar has proved itself able to survive through depressions and recessions, world wars, and global pandemics, and has ultimately rewarded shareholders for nearly a century. So even if we're heading into a period of stagflation, there is substantial long-term potential for patient investors.
