The growth stock boom of 2021 left some investors wondering if dividend stocks were still prudent holdings to drive long-term returns. Then 2022 came along and answered that concern quite clearly.
Dividend stocks are lynchpins in a diversified portfolio because of their many advantages, including:
- Most dividend stocks pay shareholders quarterly. Receiving these checks can be a lifeline for retirees or help younger folks supplement their income.
- Enrolling in a dividend reinvestment plan (DRIP) can be a terrific choice because it compounds earnings over time (more shares = larger dividends), and you can set it and forget it -- most reputable brokerages will do the legwork free of charge.
- Using dividends to reinvest in other stocks is an excellent option for those who wish to take a more active role. That growth stock trading at a discount looks mighty tempting.
- The phrase "sleep well at night" (SWAN) gets mentioned around in the investing world, but what does it really mean? A portfolio doesn't depend solely on the stock price going up when reliable dividend stocks are included in it. When the market goes south, the investor can rest a little easier knowing the portfolio still generates income while waiting for the market winds to change.
These qualities help dividend-paying stocks hold up better during a bear market. And in the current bear market, three dividend stocks -- AbbVie (ABBV 0.25%), VICI Properties (VICI 1.18%), and Texas Instruments (TXN -1.23%) -- are showing their worth (as seen in the chart below comparing them to the S&P 500).
TXN Total Return Level data by YCharts
1. AbbVie defies gravity
The major indices all fell into bear territory in 2022 and remain deep in negative return territory. The vast majority of individual stocks are down for the year, but AbbVie is not only up for the year but drubbing the S&P 500 by over 30 percentage points in total return. I've been on the AbbVie train for quite a while because of its ability to profit in a potential recession and because of its generous dividend yield (currently 3.8%).
AbbVie is best known for its blockbuster Humira prescription drug. While Humira no longer accounts for the majority of AbbVie's revenue, it still makes up about 36% of sales ($15.7 billion in 2022). AbbVie management knows it will need to make up for some lost revenue with competitive biosimilars coming to the U.S. market in 2023. To do this, AbbVie has several drugs in the pipeline and recently reaffirmed its guidance for $15 billion in annual sales from Rinvoq and Skyrizi by 2025. The company also has growing sales in aesthetics like Botox and neuroscience products like Vraylar gain traction.
The Humira overhang has some investors concerned and kept the stock price lower than it otherwise would be, so the dividend yields over 4%. AbbVie paid (and raised) the dividend each year since it got its start as a spinoff of Abbott Laboratories in 2013. The quarterly payout rose from $0.40 a share to $1.48 during this time.
What helps stabilize AbbVie as an investment is that pharmaceutical companies tend to be safe havens during economic turmoil because medications are generally necessities. AbbVie should be near the top of the list for those looking for a recession-resistant company with a quality dividend yield.
2. VICI's high yield and one-of-a-kind portfolio
VICI Properties is a real estate investment trust (REIT), which means it enjoys certain tax advantages in exchange for distributing 90% of its taxable income to shareholders as dividends.
VICI is unique, as its portfolio contains many of the world's premier entertainment properties, like Caesars Palace, MGM Grand, Mandalay Bay, and The Venetian in Las Vegas. Its portfolio includes 43 "trophy" properties in 15 states. These properties are iconic, which separates VICI from REITs that own office buildings or warehouses.
Some investors might wonder if the entertainment industry is a risky investment if the country is headed toward a recession. But investing in VICI is not the same as investing in the casinos themselves. In fact, VICI collected 100% of the rent on its properties even when many casinos were shuttered during worst of the pandemic in 2020. The dividend was even raised by 10.9% in 2020 and 9.1% in 2021.
VICI recently completed its acquisition of MGM Growth Properties, and the company seeks a relatively low adjusted fund from operations (AFFO) payout ratio, so it can continue to add properties strategically.
The dividend rose yearly since the REIT's creation in late 2017, going from an annual payout of $1.15 per share up to $1.44. The current yield is above 4.5%, and the stock price proved resilient this year. This stock is worthy of serious consideration for dividend-seeking investors.
3. Texas Instruments: 19 years of dividend growth
Texas Instruments does much more than make incredibly complex calculators used in math class. It is one of the world's leading semiconductor companies, providing 80,000 products to over 100,000 customers around the globe. The company operates in several markets, from industrials to automotive to personal electronics and more. Its product and market diversity are vital components to its continued success, even during a down economy.
Q3 results showed year-over-year increases in revenue (13%), operating profit (16%), and earnings per share (19%). Results like this should allow the company to continue its streak of dividend increases dating back to 2004. The dividend has grown at a compound annual growth rate (CAGR) of 25% during this time and currently yields around 3%.
With a history of fantastic cash management, even during severe recessions, Texas Instruments makes a strong case as a top dividend growth stock.
Compelling dividend opportunities
When looking for rays of sunshine in the stock market of 2022, uniquely positioned dividend stocks have shown through. These stocks are compelling dividend opportunities with excellent track records and compelling yields.
