Last year's market performance underscores the importance of holding safer, less volatile stocks in a well-diversified portfolio. Investors moved their money into such shares throughout the year as growth stocks plummeted.
But plan A is really having a mix of safe stocks already in your portfolio to shield it during rough times. The right balance of stocks -- each providing a different benefit -- gives you the potential for growth as well as security. This allows you to relax instead of sweating, or worse, panic selling.
Plus, passive income is a perk in any market, but you can see its value more clearly when stock prices are dropping and you still receive your check in the mail. Three stocks that are excellent choices now are Coca-Cola (KO 0.78%), Williams-Sonoma (WSM -0.13%), and Costco Wholesale (COST -0.11%).
1. Coca-Cola: The obvious choice
Coca-Cola is renowned for its dividend, and there's a good reason. The company itself rakes in hoards of cash and has a high payout ratio, retaining enough to spearhead new projects while richly rewarding investors. The payout ratio is typically around 75%, although it exceeded 100% when sales declined at the beginning of the pandemic. Today it's back below 60% in the current cost-saving environment.
What's more, Coca-Cola a Dividend King that has raised its dividend for 60 consecutive years, one of the longest streaks on the market. The shares currently yield 2.9%. It's usually closer to 3%, but the stock has performed very well recently, and yield moves inversely with stock price.
As ubiquitous as its red can might seem, Coca-Cola still sees a large addressable market to conquer. The company says it has 14% of the market in developed countries, which represent 20% of the world's population, and only 6% of the market in developing countries, or the rest of the world.
Coca-Cola has been posting some of its best performance in a long time since it rebounded from the pandemic. Sales growth had been sagging for a while. Management restructured in 2020, cutting half of its brand portfolio and redesigning its divisions, and sales are picking up momentum. Net revenue increased 10% in the 2022 third quarter, and the company managed to eke out a 14% rise in earnings per share (EPS), although margins were squeezed a little tighter.
There might be short-term headwinds as the company continues to experience the effect of inflation. But Coca-Cola should continue to grow and generate lots of cash over the next 20 years, and investors could benefit from buying the stock today.
2. Williams-Sonoma: The under-the-radar pick
Williams-Sonoma has developed from a California-based home goods store to a powerhouse conglomerate encompassing several high-end home brands. It's not an exciting growth stock, but it's a resilient one that has soundly outperformed the market over time. It's a great case of how slow and steady winning the race.
Investors may not know that Williams-Sonoma is a rare housewares retailer that did not post a single quarter of sales declines since the pandemic began. That continued with the 2022 third quarter, when comparable brand sales increased 8.1%. It also posted an increase in EPS, although operating margin was slightly down compared with last year.
Management sees an $830 billion addressable market in what it says is a fragmented industry. That piece is important because it's easier to capture that kind of market share. It has high brand recognition, and its own growth outpaces the overall industry. Although near-term inflation headwinds affect it, it's also benefiting from tailwinds of a shift to e-commerce that trails other industries. Since it offers a wide omnichannel program, it has a head start in bringing more customers to its digital presence.
The stock yields 2.2% at the current price, and like Coca-Cola, the payout ratio has decreased in this environment.
Williams-Sonoma stock doesn't always get the recognition it deserves, but it's a great choice for both stock growth and passive income. It's down 13% over the past year, and now is an excellent time to buy.
3. Costco: A (surprising) passive income superstar
Costco is a great stock to own for its reliable growth in any kind of economy, but it also offers a compelling dividend. The dividend yields what seems like a paltry 0.5% at the current price, but Costco's dividend magic is in its special dividend.
Management has issued this special dividend four times over the past 10 years, and it has ranged in amount from $5 to $10, the latter of which it gave investors in 2020. Management has made many references to issuing it again when the time is right. If the average time of issue is about every two and a half years, that's coming up in a few months.
Costco has an enviable cash position fueled by the fees it charges its members, and when that cash adds up, management distributes some extra back to shareholders. Since the beginning of the pandemic straight through the 2022 fiscal fourth quarter, sales growth has been higher than usual, resulting in elevated cash on Costco's balance sheet.
COST Cash and Equivalents (Quarterly) data by YCharts
Although cash isn't quite as high as when management issued the last special dividend in 2020, it's still much higher than the historical average, and it looks like another one could be coming down the pipeline. That makes now a great time to buy, before the next special dividend arrives. Investors can be confident in Costco's ability to provide passive income for a long time to come.
