Sailors have a saying -- "any port in a storm" -- meaning that you take safe harbor where you find it. Investors can do the equivalent of that, too, by fleeing to U.S. Treasury bonds in the event of a stock market crash.
Backed by the full faith and credit of the U.S. government, the low-risk investment can provide needed ballast for your portfolio until the storm passes. Of course, the way inflation is running rampant, you're still likely to get submerged unless you go with something like I Bonds or Treasury Inflation-Protected Securities, which will at least keep your head above water.
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But really, to hedge against a market crash, I prefer investing in dividend stocks because their steady stream of income means you don't need to solely rely upon capital appreciation to achieve gains. Moreover, dividend stocks have a proven track record of outperformance, even when the broader markets fell.
In fact, over the past 90 years, there has never been a decade when dividend-paying stocks in the S&P 500 generated negative returns, even during the so-called "lost decade" of the 2000s.
My portfolio consists of what I believe are a number of quality income-generating stocks, but there are two I believe might be better than most others for withstanding whatever the stock market may throw at them.
Consolidated Edison
Utilities were among the original "widows and orphans" stocks that were recommended because of their stability and the surety of their dividend streams. While today's energy markets are much different than they were back in the day, Consolidated Edison (ED 0.64%) -- ConEd, for short -- is still one to count on. It provides electricity, natural gas, and steam to customers in New York state, while also operating a network of utility-scale wind and solar energy projects across 20 states that can generate 3 gigawatts of power.
Where it had previously invested heavily in clean energy projects, it has since agreed to sell that business for $6.8 billion and use the proceeds to pay down debt, affording it the opportunity to not have to issue equity to finance its expansion plans. It plans to pay down over $1 billion in debt due this year, invest in its regulated utilities, and initiate a stock buyback program.
ConEd is one of the nation's largest publicly traded energy-delivery companies, with approximately $14 billion in annual revenue and $64 billion in assets. Shares of the utility are up 13% over the past year compared with the 20% decline in the S&P 500, and on a total return basis, they have edged out the popular index over the past three- and five-year periods as well.
It has paid a dividend to shareholders for over 100 years and has increased its payout for 48 consecutive years, the longest streak for any utility in the S&P 500 index, meaning it will soon become a Dividend King, or a stock that has raised its payout for 50 or more years. It also targets a payout ratio -- or the amount of its profits paid out as dividends -- of between 60% and 70% of its adjusted earnings. ConEd's dividend is currently yielding a healthy 3.3% annually.
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Cardinal Health
Just as in the gold rush of yore, the real winners were not necessarily the individual miners, but those who sold them their pickaxes and shovels. That's how I look at Cardinal Health (CAH 0.16%), a drug and laboratory products supplier. It avoids the high costs (and risks) associated with medical devices and drug development and is not reliant upon any one product.
Its end market is everyone in the medical world, and in fact, it serves almost 90% of all U.S. hospitals, 60,000 pharmacies, and more than 10,000 specialty physician offices and clinics, while also having a presence in 30 countries.
Cardinal Health establishes long-term contracts with its customers, which gives it consistency in its revenue stream, though in times of high inflation such as now, it can eat into profits. In its fiscal first quarter that ended Sept. 30, it saw profits slide 59% to $110 million as a result of inflation, rising interest rates, and supply chain issues.
Although constrained on how quickly it can raise prices, Cardinal Health has been taking pricing actions to help mitigate the effects, and more will be going into action soon. It implemented its third wave of price increases in October and is adjusting language in its contracts as they come due to allow for greater flexibility to respond to changing macroeconomic conditions.
The market has responded in kind to Cardinal's efforts, and shares are 48% higher over the past year. It has also handily outperformed the broad market index over the past three- and five-year periods on a total return basis. Yet the stock still looks cheap at 12 times next year's earnings, trading at a fraction of its sales, and going for only 7 times the free cash flow it produces.
Cardinal Health doesn't have quite the track record ConEd does in paying a dividend, but it has continuously made a payout since initiating one in 1983 and has increased the dividend every year for 36 consecutive years. It currently yields 2.6% annually.
