The old saying that the best defense is a good offense applies as much to investing as it does to football and military endeavors. Given the high potential for the economy to slip into a recession early next year, investors need a different playbook than they've used for the past decade or so.
From the end of the Great Recession to the end of 2021, the broad-based S&P 500 index rocketed 600% higher, but the tech-heavy Nasdaq-100 did even better, returning some 1,250% over that time frame. But the Nasdaq index is down 27% this year and 2023 might not be much better.
Image source: Getty Images.
Rather than using what won yesterday, investors need to fortify their portfolio for the recession that may come tomorrow, and there's no better way to do that than with dividend stocks.
Between 1930 and 2021, dividend stocks have never had a decade when they had negative returns, something even the S&P 500 itself can't say. While past performance can't guarantee future results, investors would still do well to pad their portfolios with income-generating stocks, which at least helps offset any loss of capital appreciation.
The following trio of dividend stocks could help your finances become more recession-resistant.
Coca-Cola
No non-alcoholic beverage brand is more highly valued globally than Coca-Cola (KO 2.14%), which according to the business consultancy Brand Finance, is worth $35.4 billion just on its name alone. That's far ahead of No. 2 Pepsi at $20.7 billion.
Because Coke does one thing and does it well -- making refreshing drinks the world over -- it is immediately recognizable and trusted by consumers. That's not to be trifled with in a recession, because as people cut corners to make their wallets stretch further, a brand like Coca-Cola offers immediate recognition for quality and consistency. You know what you're going to get every time you open a bottle.
Yet it has managed to keep up with the times, reducing its use of sugar, while also expanding into bottled water, tea, juice, sports drinks, and more to meet evolving consumer tastes. That's made it an exceedingly profitable business with gross, operating, and net margins that well exceed the competition, helping it produce significant amounts of excess free cash flow.
That in turn has allowed it to pay a dividend every quarter since 1920 while raising it every year since 1963. It currently yields a healthy 2.8% annually. As a Dividend King, or a stock that has increased its dividend annually for over 50 years, Coca-Cola is a worthy addition to your portfolio.
Hormel
Hormel (HRL 1.05%) is best-known for its protein products, whether under its own brand name or as part of its broad portfolio of products including Dinty Moore beef, Jennie-O turkey, Spam, and more. Last year it acquired the well-known Planters snack nuts brand from Kraft Heinz that adds to its continuously expanding line of grocery products. It also entered the market of plant-based meat alternatives with the Happy Little Plants brand established in 2019.
Hormel has been around for over 130 years, so it has been through recessions and depressions, world wars, global pandemics, and natural disasters. It is a time-tested business that is able to adjust its operations as conditions change. For example, just this year, the turkey market suffered shortages because of an avian flu outbreak that, when coupled with inflation, caused turkey prices to soar 20% ahead of Thanksgiving.
So although Hormel's Jennie-O division saw volumes tumble 20% in the third quarter and net sales drop 8%, profits rocketed 537% above the year-ago figure.
The protein company is a Dividend King like Coca-Cola, and it just announced its 57th annual increase in its payout. Hormel has made 378 consecutive quarterly dividend payments since it went public in 1928, and the latest represented a 6% hike over its previous payment. The stock now offers a 2.2% dividend yield.
Image source: Procter & Gamble.
Procter & Gamble
Consumer products giant Procter & Gamble (PG 0.54%) likely needs no introduction. Its portfolio of brands that include Crest toothpaste, Charmin toilet paper, Febreze air freshener, and Pampers diapers are often the No. 1 or No. 2 brand within their particular segments. Similar to Coke's symbol of quality, P&G products also possess global familiarity that has consumers readily willing to purchase them. More than half of its $76 billion in annual sales comes from international markets.
More so than the other companies on this list, Procter & Gamble has made dividend payments to shareholders for over 130 years and has raised its payout for more than 60 years, ensuring its inclusion among dividend royalty. P&G's dividend yields 2.5%, and with a payout ratio of 63%, it is still well within the realm of safe and secure, while having sufficient room for future growth.
Procter & Gamble itself is considered a "safe" stock that's well-suited for recessionary times because its products are decidedly in the camp of necessities and not luxuries. Even in the face of inflation and rising energy costs, P&G's organic sales grew 7% in the fiscal first quarter that ended in September.
Not that it doesn't experience softness at times from the effects of macroeconomic influences, but this is a sturdy, steady stock that would be a welcome addition to any portfolio.
