3 Blue Chip Dividend Stocks To Own In A Recession

It is a guest post from Sure Dividend.

The coronavirus crisis has caused the global economic outlook to deteriorate rapidly over the past several weeks. The U.S. economy was on strong footing heading into 2020, with strong housing and stock markets and a low unemployment rate. But the sudden impact of the coronavirus means the U.S. economy is likely about to enter a recession.

In economic downturns, investors should consider taking advantage of the buying opportunities to generate higher passive income. Income investors such as retirees should focus on high-quality stocks such as the Dividend Aristocrats, a group of 66 stocks in the S&P 500 Index with at least 25 consecutive years of dividend increases.

There are many companies that can continue to pay their dividends, even in recessions, because of their strong brands and high cash flow. We believe the following three companies are likely to provide shareholders with rising passive income, even in a recession.

Recession-Resistant Dividend Stock #1: McDonald’s (MCD)

McDonald’s is the largest publicly-traded fast food restaurant in the world, with over 38,000 locations in over 100 countries generating approximately $21 billion in annual revenue. McDonald’s has increased its dividend for 43 years in a row. It is one of the most defensive business models to invest in, as fast food typically does not suffer during economic downturns. It could even be argued that McDonald’s benefits from recessions as consumers shift their budgets away from casual restaurants and more toward fast food.

This is how McDonald’s was able to increase its earnings-per-share each year from 2008-2010, during the Great Recession. As a result, McDonald’s continued to increase its dividend throughout the recession. McDonald’s has a highly profitable business model, thanks largely to its accelerated franchising initiative.

Approximately 93% of McDonald’s restaurants are franchise-owned. The move to franchising initially lowered McDonald’s revenues but was highly accretive to earnings-per-share. Franchising places multiple costs (such as maintenance and insurance) onto the franchisee while providing McDonald’s with much higher-margin royalties.

In 2019, global comparable sales increased 5.9%, with 6.1% growth in the International Operated segment, 5% growth in the U.S., and 7.2% growth in the International Developmental Licensed segment. Diluted earnings per share of $7.88 increased 5% from 2018, or 7% growth excluding the negative impact of currency fluctuations.

McDonald’s has an attractive dividend yield of 2.7% and the dividend is highly secure. Based on 2019 earnings-per-share, McDonald’s has a trailing dividend payout ratio of 63.5%, which indicates a sustainable dividend payout.

Recession-Resistant Dividend Stock #2: Walmart (WMT)

Walmart and McDonald’s were the only two stocks within the Dow Jones Industrial Average to increase in share price in 2008. Walmart, like McDonald’s, is a highly defensive business that holds up very well during tough economic times. It is the largest U.S. retailer by annual sales. And, it is the leader in the discount retail industry, which tends to benefit from recessions as price-conscious consumers shift away from more expensive retailers.

Walmart has an impressive 46-year history of annual dividend increases, thanks to its competitive advantages. Walmart is the low-price leader in retail, due to its incredible scale. It generates annual sales above $500 billion. Its massive footprint means it can pressure suppliers to lower costs, which it can then pass on to consumers with everyday low prices.

This is why Walmart is optimally positioned even in an environment of increasing competition from Internet retailers. While e-commerce giant Amazon has taken market share from a variety of brick-and- mortar retailers, Walmart’s economic moat has largely been preserved, as the company has utilized its vast resources to invest in its own e-commerce platform.

In 2019, total revenue increased 1.9%., while currency-neutral sales increased 2.7%. Walmart U.S. comparable sales increased 2.8%, including U.S. e-commerce sales growth of 37%. Separately, international sales are another driver of Walmart’s growth. International net sales increased 2.8% in constant currency with strength in Mexico, China and India.

Walmart generated $25.3 billion in operating cash flow last year. With such strong cash flow, the company can invest in future growth initiatives, and also return cash to shareholders. Walmart returned $11.8 billion to shareholders in 2019 through dividends and share buybacks. Walmart stock has a current dividend yield of 1.6%, and a highly sustainable payout. The company had adjusted earnings- per-share of $4.93 in 2019, for a payout ratio of 44% which leaves plenty of room for continued dividend increases, even during a recession.

Recession-Resistant Dividend Stock #3: Procter & Gamble (PG)

Procter & Gamble is a consumer staples manufacturer. It has a large list of highly popular brands that are purchased every day, such as Gillette, Tide, Charmin, Crest, Pampers, Bounty, and many more. Growth has picked up in recent quarters, thanks to the company’s portfolio restructuring. P&G slimmed down by divesting slower-growth businesses such as Duracell, which was sold to Berkshire Hathaway for $4.7 billion. It also sold over 40 beauty brands for $12.5 billion. These efforts have paid off. P&G has returned to higher rates of growth, including 6% organic sales growth and 10% core earnings-per-share growth in the most recent quarter.

P&G is uniquely positioned to survive the coronavirus crisis, as many of the company’s products are seeing increasing demand due to consumer stockpiling. Therefore, P&G should be able to navigate an upcoming recession relatively well, especially compared with more vulnerable sectors of the economy.

P&G held up extremely well in the Great Recession, the last economic downturn the U.S. has faced. The company’s earnings-per-share declined just 1.6% in 2009 and 1.4% in 2010. But the company remained highly profitable, which allowed it to continue increasing its dividend throughout. And, it quickly returned to growth in 2011 and beyond. P&G increased its dividend by 6% on April 14th.

P&G has a very long history of steady dividends. The company has increased its dividend for 64 consecutive years, and it has also paid a dividend to shareholders for 130 consecutive years. It has paid a dividend ever since its incorporation in 1890. Such an impressive dividend history proves it has the ability to generate rising passive income for long-term shareholders, throughout recessions and other difficult periods. P&G is on the list of Dividend Aristocrats, and is also on the list of Dividend Kings. The Dividend Kings are an even more exclusive group of just 30 stocks that have raised their dividends for 50+ consecutive years.