After a pretty substantial decline in October, the stock market is once again hovering near its all-time high. Although we all hope the gains continue, there is nothing wrong with playing a little defense when the market moves higher as quickly as it has recently.
In the event of another correction or even a crash, how would your portfolio hold up? One of the best ways to ensure your portfolio can withstand anything the market throws at it is to load up on high-quality dividend growth stocks.
Here are three of my favorites, which should do just fine no matter what the market does.
Long-term leases and fixed expenses mean predictability
A particularly strong investment for tough times is commercial real estate, or more specifically, a real estate investment trust like National Retail Properties (NYSE:NNN) that specializes in this market.
The biggest difference between commercial real estate and residential properties such as apartment buildings is stability. Commercial tenants tend to sign much longer leases -- in fact, National Retail's average lease has 12 years remaining. And annual rent increases are almost always built right into the lease, so the company can accurately predict its income for years to come. On the other hand, residential leases typically last one year, and there is no guarantee the property will bring in more rent from year to year.
Also, commercial tenants sign "triple net" leases, which means the tenant is responsible for property taxes, building insurance, and maintenance during the course of the lease. This eliminates most of the variable costs associated with residential rental properties. All commercial landlords have to do is collect a rent check.
National Retail Properties is among the best in its class, as 98.8% of its properties are occupied, mostly by well-known, high-quality tenants such as SunTrust, LA Fitness, and Camping World. No tenant makes up more than 5% of the portfolio, and the trust's approximately 2,000 properties are geographically diversified across 47 states.
The proof is in the performance. Over the past 20 years, the S&P 500 produced an average annual total return of 9.6%; National Retail Properties handily beat that with an average total return of 13.5% per year, including its healthy dividend yield of about 4.5%.
Where will people spend their money in tough times?
When consumers' retirement accounts are shrinking and unemployment is on the rise, where are they going to shop? During tough times, higher-end retailers such as Tiffany and Abercrombie & Fitch tend to get crushed. On the other hand, discount, high-volume retailers with a wide variety of products, such as Wal-Mart (NYSE:WMT), thrive. Just look at these companies' performance during 2008 and 2009, and especially notice how much more the luxury retailers dropped during the worst part of the crash.
Wal-Mart's business model works in both good times and bad, because it sells things that people need, not just things they want. And the company's "one-stop shop" business model keeps adding new features, including hair salons, banks, gas stations, and optometrists.
As a dividend investment, consider that Wal-Mart has increased its payout for 39 consecutive years, and has a very low dividend ratio of less than 40%, meaning shareholders' income should continue to rise for the foreseeable future.
A "boring" healthcare company that's actually pretty exciting
Too many investors, especially the younger ones, find companies like Johnson & Johnson (NYSE:JNJ) to be rather boring. Unfortunately for them, these "boring" investments often produce the best returns.
Johnson & Johnson is one of the largest and most diverse healthcare companies in the world, with a market cap over $300 billion and more than 250 operating companies selling its products all over the world.
The company's revenue comes from pharmaceuticals (39%), medical devices (40%), and consumer products (21%), including well-known brands such as Band-Aid, Tylenol, Neutrogena, and J&J's line of baby-care products. In other words, Johnson & Johnson produces products people buy no matter what the economy is doing, which makes it a great choice if you think a correction or crash is coming.
Not only is Johnson & Johnson a rock-solid dividend stock with 51 consecutive years of increases, but it has produced excellent growth as well. Just check out this performance against the S&P over the past 20 years, during which time the company has produced an annualized total return averaging almost 13.5%.
A $10,000 investment in J&J 20 years ago would have grown to about $124,000 today. Not so boring after all.
This is just a start
Of course, this is not an exhaustive list of dividend stocks that can work well during bad times. However, these companies are great examples that provide clear reasons why they work during tough times, and have the performance history to back it up.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.