In a period of market turmoil, dividend stocks can often provide stability to a portfolio with the consistent payouts to shareholders and historically less volatile stock prices. Beyond the general dependability of dividend-paying stocks, companies with a history of increasing their dividends have historically outperformed the overall stock market.
With that in mind, here are three dividend stocks that could help recession-proof your portfolio.
1. Casey's General Stores
Casey's General Stores (CASY 0.68%), a leading U.S. convenience-store chain, has raised its dividend for 23 consecutive years and has paid a dividend each quarter for more than 30 years. Its current quarterly dividend is $0.38 per share, which yields about 0.70%.
For any dividend stock, one important metric to look at is the payout ratio (annual dividend payments divided by annual earnings), which measures the company's ability to pay out dividends over a period of time.
Generally, investors should look for a payout ratio lower than 75% because it shows a stable dividend and signals that the company is likely to continue paying dividends in the future. With the payout ratio at Casey's being a paltry 12%, the convenience-store chain should be able to raise its dividend for the foreseeable future.
Revenue and earnings per share (EPS) are both soaring, too. For the first nine months of fiscal 2023, the company generated $11.7 billion in total revenue and $10.42 in diluted EPS, representing year-over-year growth of 23.9% and 38.9%, respectively.
Despite its dividend history and total return of roughly 95% over the past five years, the electrification of cars could create some anxiety for shareholders. Over the past nine reported months, same-store sales for gallons of gas decreased by 0.9% year over year. Gas sales provide a healthy margin to the business, at 40.7 cents per gallon, equating to $855 million in gross profit during the first nine months of fiscal 2023.
In the short term, America is very much fueled by gas, with only 1% of the estimated 250 million cars on the roads being electric, meaning gasoline sales at Casey's should continue to be bountiful and profitable. However, in the long run, Casey's will probably need to transition to electric-vehicle chargers, as experts estimate that electric vehicles could make up 60% to 70% of cars on the road by 2050. The good news is that the company is already taking this step, with 138 EV chargers across 28 locations, and plans to add more this year.
In the face of a recession, Casey's General Stores is well- positioned to service the needs of drivers who will be on the roads in good times and bad, making it an excellent stock to add to dividend-seeking portfolios.
2. Costco
In a recession, consumers become more price conscious, often searching for the best deals to save a buck. For most shoppers, the retailer that immediately comes to mind for saving money on daily essentials is Costco Wholesale (COST -0.12%).
The stock for the membership-only retailer is down nearly 10% over the past 12 months but is up more than 150% over the past five years.
Costco's quarterly dividend of $0.90 represents a yield of 0.76% and a payout ratio of roughly 26%. On the surface, Costco's dividend may look unimpressive. However, investors should be aware that the company has raised its dividend yearly since 2004 and regularly pays a special cash dividend about every three years, with the last one coming in December 2020 for $10 per share.
Costco's membership numbers give an insight into the company's popularity among consumers. First, its renewal rate -- the percentage of its customers who renew their membership each year -- is an impressive 92.6% in the U.S. and Canada and 90.5% worldwide.
Second, the number of Costco members increased from 63.4 million to 68.1 million over the past 12 months, a roughly 7.4% increase. As a result, the company generated roughly $4.3 billion over the past 12 months. These fees are highly profitable, and management has a history of raising them an average of every five years and seven months. With the last membership fee raise coming in June 2017, or five years and nine months ago, it's reasonable to expect another increase soon.
Image source: Getty images.
The definitive downside to Costco stock is its valuation. A popular valuation metric for established companies is the price-to-earnings (P/E) ratio, and Costco is currently around 35. For reference, Costco competitors Target and Walmart have P/E ratios of about 26 and 32, respectively.
Beyond Costco's impressive business model and dividend history, the market values it above its competition because of its past performance. Over the decade, Costco stock crushed the market with a total return of 456%, versus the market's 199%.
Still, with Costco's dividend history and sticky business model, the stock should continue beating the S&P 500 -- just as it has done for years.
Are these dividend stocks buys?
Dividend-paying stocks can provide a sense of security in uncertain markets, as you receive income each quarter just for owning the stock. Moreover, these stocks are often less risky because management knows it must allocate a portion of the company's earnings to its shareholders.
These two stocks, in particular, specialize in selling consumer necessities, which should insulate them against a market downturn while paying you to hold them in your portfolio.
