There's nothing better to ride out a market downturn than getting paid to hold stocks. But there's data to support the idea of regularly adding money to top dividend stocks.
Since 1960, a $10,000 investment in the S&P 500 index would have returned $641,091 through 2022, according to Hartford Funds. But reinvesting dividends would have grown the investment to over $4 million. That's the power of dividends and compounding returns.
If you're interested in padding your portfolio with more income, here's why I would consider buying shares of McDonald's (MCD -0.58%), TJX Companies (TJX 0.37%), and FedEx (FDX 0.04%).
1. McDonald's
The golden arches reported steady comparable-store sales growth over the last few years, even as macroeconomic headwinds like inflation have pressured consumer spending. But its value menu makes for a relatively resilient business in tough times.
Global comp sales grew 12% in the final quarter of fiscal 2022, which was in line with the previous year's quarter. It was a strong finish to a year where full-year comp sales were up 11% over the previous year.
Based on recent strength across the business, including a 40% increase in digital transactions last quarter, management is now starting to lean more on new restaurant openings as part of its Accelerating the Arches growth strategy. Management expects a 4% unit growth this year, which will contribute 1.5% to overall systemwide sales growth.
McDonald's is clearly on the offense, and this spells good news for dividend growth investors. In November, the company raised its quarterly dividend by 10%. McDonald's will likely pay its next quarterly dividend in June. At $1.52 per share, the dividend yield on the stock of 2.05% looks attractive relative to the average stock's yield of 1.58%.
Strong performance in a difficult environment only strengthens the investment case. McDonald's has nearly doubled its dividend payment over the last decade while paying out typically less than 80% of free cash flow.
McDonald's is still driving top-line growth and raising the dividend by double digits after more than 50 years since its founding. That's a stock worth holding for a lifetime.
2. TJX Companies
TJX's business model is perfectly suited to outperform the apparel industry in a recession. The treasure hunt aspect of shopping its stores, where management is constantly shuffling new merchandise in and out depending on what is available, gives the company a competitive advantage.
The company operates T.J. Maxx, Marshalls, and Homegoods stores. These businesses have generated consistent profitability and sales growth through all economic cycles. While last year's comp sales were flat compared to an increase of 17% from open-only stores in the previous year, TJX finished the year strong. In the fourth quarter, U.S. comp sales across all segments grew 4% year over year.
Most importantly, TJX grew earnings per share by 14% year over year last quarter. Management is focused on improving profitability further in calendar 2023, and this profitable model points to further dividend increases.
TJX recently raised its quarterly dividend by 13% to $0.3325 per share. The company has paid a dividend for 27 years, which has increased at an annualized rate of 20%. The cash payout ratio is currently around 50%, so TJX has ample room to increase the dividend even if sales were to slump temporarily.
The weak economy gives TJX a catalyst for more sales growth. For example, with weaker clothing sales, management is seeing attractive opportunities to acquire quality branded merchandise on the cheap to resell to its customers.
While TJX's dividend yield is the lowest on offer here at 1.51%, investors are getting a stock that will likely continue to grow the dividend at a high clip. Over the last 10 years, TJX raised the dividend payment by 420%. The growth in income helped turn a $1,000 investment into $3,700 with dividends reinvested. With management still finding opportunities to open new stores, TJX should continue to deliver satisfactory returns for many years.
3. FedEx
Ironically, it's not the consumer-facing businesses of McDonald's and TJX that are struggling right now, but FedEx. The delivery carrier reported $22.6 billion in revenue for the fiscal third quarter ending Feb. 28 -- down from $23.6 billion in the year-ago quarter. Inflationary costs and lower package volumes contributed to adjusted earnings of $3.41 compared to $4.59 a year ago.
Despite the weak performance on the bottom line, FedEx has been through these ups and downs before. Moreover, management has a plan to cut costs, so the recent profit dip should be only temporary. That's why it also raised its quarterly dividend by 10% recently, bringing the annual payment to $5.04 per share, or a yield of 2.16%.
In fact, FedEx has grown its dividend even faster than the other stocks we've looked at. Over the last 10 years, its quarterly payment has increased by 720%. FedEx currently pays out about 51% of its free cash flow, so it also has plenty of room to maintain and grow the dividend under difficult economic circumstances.
The stock's recent haircut could be a great buying opportunity, and not just because of the above-average yield. Management recently unveiled its plan to consolidate the Express, Ground, and other shipping services under one operating network. This is expected to save the company a lot of money -- a total of $6 billion by fiscal 2027 -- and that could be good for profits and, you guessed it, dividends.
FedEx could deliver significant earnings growth just from this cost savings plan, considering it generated $2.9 billion of net profit over the last year. With the stock trading at a modest forward price-to-earnings ratio of 15.5 to go along with an attractive dividend yield, FedEx should deliver solid returns from here.
