While the markets have shown some stability this year, some experts still see more volatility ahead. Investors who want to add defensive stocks to their holdings should consider companies that sell everyday essentials and have already proven to be relatively strong performers over the last year.
McDonald's (MCD -0.03%) and Procter & Gamble (PG -0.22%) both outperformed the S&P 500 index over the last 15 months. Both pay above-average dividend yields and have wide competitive moats that should lead to many more years of dividend increases.
Let's look at each company's dividend record and competitive strengths that make these two stocks solid holdings for 2023 and beyond.
1. McDonald's
McDonald's is one of the strongest consumer brands around. Its global presence, value menu, and brand recognition helped it produce decades of profitable growth. The company has paid a dividend since 1976 with the current quarterly payout at $1.38 per share, bringing the stock's yield to 2.11% -- above the S&P 500 average of 1.63%.
McDonald's is such a dominant restaurant franchise it can turn in decent results no matter how the economy is performing. It has grown its dividend by 92% over the last decade while keeping its cash payout as a percentage of free cash flow around 80% or less.
Consumers value its affordable menu during tough times. Despite recent spikes in inflation and economic uncertainty, McDonald's still grew comparable store sales by nearly 11% in 2022. Even more impressive is the company's elite profitability, with operating margin improving to 44% last year -- higher than Microsoft and other tech companies.
The company is executing its Accelerating the Arches strategy, which involves doubling down on delivery and digital, and it's delivering results. In the fourth quarter, McDonald's digital sales in its top six markets represented 35% of total systemwide digital sales. The McDonald's app was downloaded over 40 million times, indicating tremendous brand power.
A business that can continue to post double-digit sales growth after almost 70 years since its founding is worth a lot. Given the strong growth last year, the stock has outperformed the S&P 500 index since the end of 2021, up 2.45% compared to a loss of 16.5% for the index. The stock's above-average yield suggests it should continue to outperform as investors rush to safety when the broader market gets volatile.
2. Procter & Gamble
Procter & Gamble is another powerhouse brand that has an even longer record of paying dividends than the golden arches. P&G has paid a dividend for 132 years, with 66 consecutive years of dividend increases. Its recent quarterly dividend payment comes to $0.9133 per share, bringing the stock's yield to 2.50%. P&G paid out 77% of its free cash flow over the last four quarters, which still leaves cash for the company to reinvest in growth initiatives and product development.
P&G's dividend streak indicates a wide competitive moat around its brands. P&G owns a stable of products that people buy every day, including Tide detergent, Bounty paper towels, Gillette razors, and Crest toothpaste. These are products shoppers will buy regardless of how the economy is performing.
P&G's efforts in recent years to shed underperforming brands in favor of those that offer superior product performance helped deliver solid top-line increases. While volumes fell 6% year over year in the last quarter, price increases lifted total adjusted sales by 5%.
Another advantage is P&G's distribution capabilities. The company's supply chain capabilities have been rated No. 1 in the Advantage survey by its retail partners over the last seven years. Management's focus on superiority in everything it does, from product packaging and marketing to distribution, is a key competitive advantage.
Like McDonald's, P&G's operating margin has steadily climbed higher in recent years, allowing more profit to be reinvested in the business or distributed to shareholders. Although operating margin fell slightly last year, management raised its outlook for adjusted sales and earnings per share and expects to pay 90% of its free cash flow in dividends.
P&G has held up better than the S&P 500 through this market correction, falling 10.5%. The company's strong brands and above-average yield make it a top stock to anchor anyone's portfolio.