Fears of a recession did not materialize this year. However, it's always worth it for investors to buy shares of companies that can perform well during economic downturns. Solid dividend stocks that routinely increase their payouts are especially attractive in that regard, since they tend to have businesses equipped to withstand challenging times.
Let's discuss three stocks to buy to prepare your portfolio for any recession that may lay ahead: Microsoft (MSFT 0.15%), Johnson & Johnson (JNJ +0.27%), and Coca-Cola (KO +0.36%). Two of them are Dividend Kings, corporations that have achieved at least 50 consecutive years of dividend increases. All three are solid dividend payers.
But could they rise by 100% in the next five years? Let's find out.
Image source: Getty Images.
1. Microsoft
Microsoft has moved sideways for the past six months. With a market cap of $3.5 trillion, some might argue that its high-growth days are behind it. But Microsoft still has plenty to offer growth-oriented investors and, in my view, is well-equipped to register the 14.9% compound annual growth rate (CAGR) necessary over the next five years to double in value.
The company's work in cloud computing and artificial intelligence (AI) looks especially promising. Microsoft's revenue from its cloud division, Azure, is growing rapidly, as is its contracted backlog, which is a strong indication that demand for the services Microsoft provides remains high.
NASDAQ: MSFT
Key Data Points
One of the company's most notable partners is OpenAI, from which it recently secured a $250 billion Azure commitment. Through 2032, Microsoft will have intellectual property rights to OpenAI's models (still among the market leaders) and products.
Being able to offer OpenAI's models to its customers through Azure is a significant selling point for Microsoft, and it is likely one of the reasons it has been gaining ground on Amazon, the leader in cloud computing. From the looks of it, this tailwind will remain intact through the next few years.
Microsoft remains a terrific growth stock, and the dividend is almost a bonus. The company has increased its payouts by 152.8% in the past decade.
2. Johnson & Johnson
Several things make Johnson & Johnson an excellent "recession-proof" stock.
First, since it sells healthcare products, including pharmaceutical drugs that remain in high demand regardless of economic conditions, it tends to generate consistent revenue and profits, even during economic downturns. Patients won't want to cut down on lifesaving drugs, and it also helps that third-party payers foot a lot of the bill.
Second, Johnson & Johnson also has a rock-solid balance sheet with a credit rating above that of the U.S. government.
Third, there is the dividend. J&J is on a streak of 63 consecutive payout increases. It is likely one of the safest dividend programs on the planet. All these factors make the healthcare leader a top pick for low-risk, dividend-seeking investors, but could it achieve the 14.9% CAGR necessary to double over the next five years? In my view, it is unlikely to do so.
NYSE: JNJ
Key Data Points
Johnson & Johnson faces several headwinds that could hinder its ability to deliver such outstanding returns. One of the most important is drug price negotiations in the U.S., with several of its medicines having already been targeted -- which will lead to lower prices for these products.
True, Johnson & Johnson also has some potential growth avenues. It is working on a promising robotic-assisted surgery (RAS) system, the Ottava, that will help it join this underpenetrated market. However, it will take some time for this to have a meaningful effect on its results. None of that means Johnson & Johnson isn't a buy, though. It just means that the stock probably won't double in five years.
3. Coca-Cola
Coca-Cola is a leading consumer staples company -- an industry that is also famously resilient. Even when the economy isn't doing well, the beverage maker attracts a decent amount of business thanks to its famous brand name (and many other smaller brands, some of which dominate their niches), and a large portfolio of products across most drink categories.
This is also an innovative company that routinely launches new products, or just repackages old ones in ways to make them more attractive in current market conditions. That includes catering to price-sensitive consumers. People can cut down on beverages during recessions more easily than they cut down on medications.
However, Coca-Cola's strategy can somewhat limit (though not eliminate) the effect of this threat. It has, after all, allowed the company to perform well over the past few decades and maintain a strong dividend program throughout. With a streak of 63 consecutive dividend increases, it is also a Dividend King.
NYSE: KO
Key Data Points
Coca-Cola is highly unlikely to double in the next five years. It will face stiff competition and macroeconomic headwinds (including inflation and tariffs), coupled with relatively slow volume and revenue growth, which hardly fit the profile of a high-growth stock capable of doubling in five years. These challenges won't break Coca-Cola's business, but they also limit its upside.
The stock remains a reliable and steady choice for income investors. But seekers of high growth should look elsewhere.
