4 High-Quality Stocks To Buy & Hold Forever
The pandemic sunk the economy into recession this year, and the outlook moving forward remains highly uncertain. In times of economic recession, investors should prioritize dividend safety. Instead of buying stocks with the highest yields, it makes sense to focus on quality, asserts Ben Reynolds, editor of the just-launched Sure Passive Income newsletter.
Stocks across multiple hard-hit industries, such as retail, restaurants, and energy, have cut or suspended their dividends in 2020, with more likely to follow if the U.S. economy enters an even deeper recession.
Investors looking for dividend safety should take a closer look at these four blue-chip dividend stocks. All four stocks were included in the inaugural edition of the new Sure Passive Income newsletter. We believe all four stocks with continue to raise their dividends each year, regardless of the state of the economy.
Johnson & Johnson (JNJ)
Johnson & Johnson is a diversified health care giant, with over $82 billion in 2019 revenue and a market capitalization of $379 billion. J&J is a global leader in three separate categories—consumer health, medical devices, and pharmaceuticals. Approximately 40% of sales last year were generated outside the United States.
This diversification has served the company well, as it has a long history of generating steady growth. For the past 36 years in a row, Johnson & Johnson has reported positive growth in its adjusted operating earnings. It has also raised its dividend for 58 consecutive years. Such a long history of dividend growth places Johnson & Johnson on the exclusive list of Dividend Kings.
It has increased its dividend each year, even during recessions. Johnson & Johnson performed very well in the ‘Great Recession’ of 2008-2009. Earnings-per-share grew by 10% in 2008, and 1% in 2009, during the Great Recession. The company’s resilience stems from the fact that as a healthcare manufacturer, its customers cannot stop purchasing their products, even in a recession.
Investors can expect the company to continue growing its dividend each year, because of its global competitive advantages such as its massive research and development. Johnson & Johnson’s R&D totaled $11.4 billion last year, the 10th highest sum in the world. The result of its high annual R&D investment is that Johnson & Johnson has a large portfolio of industry-leading brands.
In fact, Johnson & Johnson has 26 individual platforms or products that each generate over $1 billion in annual sales. Approximately 25% of the company’s sales come from products that were launched in the last five years, which demonstrates the effectiveness of Johnson & Johnson’s massive R&D platform. The company has continued to perform well in 2020, even with the coronavirus pandemic wreaking havoc on the global economy.
Johnson & Johnson announced third-quarter earnings results on October 13th which showed 2% operational sales growth along with 3.8% adjusted earnings-per-share growth. The pharmaceutical segment continued to perform well, with sales growing 5%, while consumer sales grew 1.3% for the most recent quarter.
Johnson & Johnson’s dividend payout is highly secure, thanks to the company’s highly profitable and recession-resistant business model. The company possesses a credit rating of AAA, making it only one of two U.S. companies to hold the highest credit rating from S&P (the other being Microsoft). Johnson & Johnson stock has a 2.8% current dividend yield.
The Coca-Cola Company (KO)
Coca-Cola is one of the largest beverage companies in the world. Its products are sold in more than 200 countries globally, with over 500 individual brands in the company’s portfolio. Coca-Cola has a portfolio full of category-leading brands in both sparkling and non-sparkling beverages.
Just a few of its premier brands include Coca-Cola, Diet Coke, Sprite, Dasani, Minute Maid, Simply, Gold Peak, Honest Tea, and many more.
Coca-Cola’s dividend payout is extremely safe, even in a severe recession, largely due to the company’s brand portfolio. Coca-Cola products are consumed every day by millions of people, even during recessions, which adds a margin of safety. Coca-Cola’s large and diversified product portfolio (it has 20 brands that each collect at least $1 billion in annual revenue) provide it with steady demand each year.
Even in 2020, a highly challenging environment, Coca-Cola continues to report steady results. Adjusted earnings-per-share declined just 2% in the third quarter, as the coronavirus pandemic led to a 4% drop in global case volumes.
Coca-Cola’s operating margin actually improved to 26.6% for the quarter, from 26.3% in the year-ago period. The company’s ability to keep margins afloat helps it to remain highly profitable, even in a difficult climate.
Going forward, Coca-Cola has the potential to return to growth, as the global beverage industry still offers opportunity. Soda consumption has declined in the U.S. for over a decade, which is a lingering headwind. But Coca-Cola is responding by investing in adjacent categories such as coffee.
For example, Coca-Cola acquired Costa in a $4.9 billion acquisition, which gave it instant exposure to coffee, a growth market. Coca-Cola stated at the time of the acquisition that the global coffee market was growing at 6% per year, and Costa has operations in more than 30 countries around the world. Coca-Cola stock yields 3.3%, and the company has increased its dividend for 58 consecutive years.
Lockheed Martin (LMT)
Lockheed Martin is the world’s largest defense company. Its largest customer is the U.S. Department of Defense, which represents 60% of its revenue. Its other customers include international government agencies as well as other agencies within the U.S. government. Lockheed Martin had nearly $60 billion in revenue last year. The stock has a market capitalization of $103 billion.
The company consists of four business segments. The largest segment is Aeronautics, which represents approximately 41% of the company’s sales and consists of military aircraft like the F-35, F-22, F-16 and C-130. Next is the Rotary and Mission Systems segment at 26% of sales, and includes combat ships, naval electronics, and helicopters.
The Missiles and Fire Control segment creates missile defense systems and represents 16% of sales, and the company also manufactures satellites in its Space Systems segment, representing the remaining 17% of company revenue.
The company has barely skipped a beat to start 2020. For the second quarter, net sales increased by 11% to $16.2 billion, while earnings-per-share rose 16% year-over-year. All four of its business segments increased net sales in the quarter. The Aeronautics segment increased net sales 16% due to increased production of the F-35, combined with higher development, sustainment, and classified contracts.
Meanwhile, Lockheed Martin’s Missiles and Fire Control segment increased sales 14% due to higher sales from High-Mobility Artillery Rocket Systems, Guided Multiple Launch Rocket Systems, Terminal High Altitude Area Defense, and Patriot Advanced Capability-3 volumes.
Rotary and Mission Systems net sales increased 3% on higher volumes for Seahawk and VH-92A programs. Lastly, the Space segment grew sales by 9% as a result of higher volumes in Next Generation Overhead Persistent Infrared and hyper-sonics.
Going forward, there remains ample opportunity for future growth, as Lockheed Martin ended the most recent quarter with a backlog of approximately $150 billion. The company also upped its revenue and earnings forecast for the remainder of 2020, reflecting the positive momentum it has enjoyed to begin the year. Lockheed Martin sees relatively stable demand each year, even during recessions, as the U.S. and its allies in international regions have a continuing need for defense products and services.
Lockheed Martin has increased its dividend for 18 consecutive years. In September, the company not only increased its dividend by 8.5%, but it also added $1.8 billion to its share repurchase authorization, upping the total buyback authorization to approximately $3 billion.
Lockheed Martin is a very shareholder-friendly company, with a management team that is committed to returning excess cash to shareholders through buybacks and dividends. Lockheed Martin has a 2.8% current dividend yield.
Colgate-Palmolive Co. (CL)
Colgate-Palmolive was founded all the way back in 1806. Today, it is a consumer staples giant that sells its products in over 200 countries around the world. It operates in four core categories: Oral Care, Personal Care, Home Care, and Pet Nutrition. The company’s most recognizable brands include Colgate, Palmolive, Softsoap, Ajax, and Hill’s among others.
Colgate-Palmolive dominates the toothpaste market, with the #1 global position. Colgate holds a 40% share in the global toothpaste market.
Such an iron-clad grip on its core market has allowed Colgate-Palmolive to reward shareholders with steady dividends for over a century. The company has paid uninterrupted dividends since 1895. It has increased its dividend for 58 consecutive years.
Colgate-Palmolive’s strong brand portfolio is a major competitive advantage, and adds safety to the dividend, particularly in a recession.
The company sells products like toothpaste, soap, and pet food, which consumers still need even when the economy enters a downturn. For example, Colgate-Palmolive actually grew its earnings-per-share by 28% from 2007 to 2010, which included the Great Recession years.
Colgate-Palmolive’s financial results have actually improved to start 2020, as the pandemic has caused consumers to stockpile their pantries with staples products.
In the 2020 second quarter, Colgate-Palmolive reported organic sales growth of 5.5%, while base earnings-per-share increased 3% year-over-year. Colgate-Palmolive’s results were especially strong domestically, with 11% organic sales growth in North America.
Colgate-Palmolive’s dividend is safe, thanks to the company’s consistent earnings. Analysts currently expect the company to generate earnings-per-share of $2.96 for 2020.
With an annual dividend payout of $1.76 per share, Colgate-Palmolive is expected to have a dividend payout ratio of approximately 60%. This is a healthy dividend payout ratio, which gives sufficient coverage of the dividend while leaving room for additional increases each year.
Colgate-Palmolive stock has a 2.2% dividend yield. Although it does not qualify as a high-yield stock, Colgate-Palmolive increases its dividend reliably every year like clockwork. And, the yield still beats the average S&P 500 Index yield, currently around 1.7%.
The U.S. economy entered a recession in 2020, ending over a decade of economic expansion. Investors should therefore become more selective in an environment marked by economic uncertainty. Rather than reach for extreme high-yielders, many of which could be in dubious financial condition, investors should focus their portfolios on quality.
The four stocks mentioned above do not have the highest yields around, but they do offer stability and consistent dividend growth, even in a prolonged recession. Johnson & Johnson, Coca-Cola, Lockheed Martin, and Colgate-Palmolive all pay dividends to shareholders, with yields that beat the broader index average.
They are all highly likely to raise their dividends for many years ahead, due to their industry-leading market share and global competitive advantages. For all these reasons, these four stocks were recommended in the first edition of the Sure Passive Income newsletter.