9 Best Dividend Stocks for Bear Markets
It's no secret that dividend-paying stocks often come out ahead during a market sell-off.
It's no secret that dividend-paying stocks often come out ahead during a market sell-off. In 2008, when Standard & Poor’s 500-stock index nosedived 37%, the S&P 500 Dividend Aristocrats, an index of large companies that have raised their dividends every year for the past 25 years, surrendered a more tolerable 22%.
But dividends don’t always protect you against the worst of a market drop. Consider Bank of America (BAC), which had been a steady dividend payer up until the financial crisis. Then, in 2008, the stock gave up a whopping 63%. How dividend-paying stocks perform “depends on the type of bear market you have,” says Chris Philips, a senior investment analyst at Vanguard.
That being said, some dividend stocks have a better record than others. Here, we’ve identified nine such firms based on their performance during three hostile periods: the bursting-of-the-tech-bubble bear market, from 2000 to 2002, when the S&P 500 plunged 47.4%; the financial-crisis-related 2007-09 disaster, during which the index plummeted 55.3%; and the 2011 correction, a five-month period during which the S&P stumbled 18.6%, just shy of the 20% drop that typically defines a bear market.
These companies have products or services that consumers will pay for, even in a tough economy. Seven out of the nine stocks boast yields higher than the S&P 500’s 1.9% payout. And eight of the nine companies derive the bulk of their sales in the U.S., leaving them relatively insulated from the negative effects of a powerful dollar (when the greenback strengthens, overseas profits translate into fewer dollars).
Prices and other figures are as of January 28. Down market dates are March 24, 2000, to October 9, 2002; October 9, 2007, to March 9, 2009; and April 29, 2011, to October 3, 2011. Companies are listed alphabetically.
Abbott Laboratories
- Share price: $43.41
Market capitalization: $65.4 billion
Yield: 2.2%
Headquarters: Abbott Park, Ill.
Down market total returns:
2000-02 bear market: 26.0%
2007-09 bear market: -11.6%
2011 correction: -2.8%
Health care needs are growing steadily, and Abbott Labs (ABT), a diagnostics, medical-device and nutritional-formula company, is profiting. In 2013, the firm spun off its brand-name-drug business, AbbVie (ABBV). Last year, Abbott announced that it would sell its generic-drug operations in foreign developed markets but hang on to the business in developing nations. The moves should allow Abbott to focus on faster-growing regions. An aging population and broader insurance coverage in the U.S., for example, will help drive sales of medical devices in 2015, according to investment bank Barclays. Abbot has the most global exposure of the companies on our list, with 69% of sales coming from foreign markets in the third quarter of 2014. And although a strong dollar could hurt overseas profits in the near term, company execs believe the market in China alone for in-vitro diagnostics (tests to detect health conditions and diseases) could grow by an average of more than 15% annually through 2018.
The Clorox Company
- Share price: $107.10
Market capitalization: $13.9 billion
Yield: 2.8%
Headquarters: Oakland, Calif.
Down market total returns:
2000-02 bear market: 28.6%
2007-09 bear market: -22.9%
2011 correction: -6.6%
During a market downturn, stocks of companies that make essential consumer goods tend to do better than most. Clorox (CLX), which makes household cleaning and other supplies, is one of the best examples. The company owns category-leading brands, including its namesake bleach and Glad trash bags. As such, from 2008 to 2010, Clorox was able to increase sales by an average of 4.5% annually. The company also continued to raise its dividend, which it has upped every year since 1977.
Lately, competition has put pressure on core segments of the business, such as bleach, disinfecting wipes and cat litter. But Clorox has taken steps to roll out new products. Sales edged down by 0.3% in the fiscal year that ended in June 2014, but analysts expect revenues to climb for the fiscal year that ends this June. Clorox gets about 20% of its revenues overseas.
Consolidated Edison
- Share price: $70.85
Market capitalization: $20.8 billion
Yield: 3.7%
Headquarters: New York, NY
Down market total returns:
2000-02 bear market: 61.3%
2007-09 bear market: -25.6%
2011 correction: 10.8%
You won’t have to worry about overseas exposure for Consolidated Edison (ED). The holding company derives 100% of its revenues from two utilities that supply electric and gas service to millions of customers in and around New York City. The vast majority of the company’s business is regulated, which helps Con Ed earn steady profits. So during the financial crisis, the firm was able to keep raising its dividend. In fact, Con Ed has increased its payout for 41 consecutive years.
Rising interest rates could put pressure on the utility’s stock, but Con Ed’s investments in solar energy projects and system upgrades should help spur modest growth, by 1.3% in 2015, if analysts are correct with their forecasts. The stock’s hefty yield is nearly twice that of the S&P 500, providing extra protection should the bear strike.
General Mills
- Share price: $54.08
Market capitalization: $32.7 billion
Yield: 3.0%
Headquarters: Minneapolis, Minn.
Down market total returns:
2000-02 bear market: 34.8%
2007-09 bear market: -11.9%
2011 correction: -0.8% - General Mills (GIS) owns a pantryful of iconic brands, including Cheerios, Häagen-Dazs and Yoplait. So it may come as no surprise that in the fiscal year that ended in May 2009, when consumers were keeping a tight grip on their wallets, sales at General Mills expanded 8% from the previous year. The stock couldn’t escape the market’s sell-off during the financial crisis, but the loss was dramatically smaller than the S&P 500’s 55% rout.
Today, General Mills is struggling to appeal to health-conscious consumers, but the firm is making changes, including offering high-protein Cheerios. The company “has proven able to adjust over time to consumers,” says investment bank RBC Capital Markets. In the quarter that ended in November, 28% of General Mills’ sales came from abroad.
Hormel Foods
- Share price: $52.40
Market capitalization: $13.8 billion
Yield: 1.9%
Headquarters: Austin, Minn.
Down market total returns:
2000-02 bear market: 59.7%
2007-09 bear market: -15.0%
2011 correction: -9.4%
During hard times, households eat more Spam, the precooked canned meat. That helps Hormel Foods (HRL), which makes Spam and other processed foods, such as deli meats, bacon and Skippy peanut butter. One particularly bright spot is Hormel’s Jennie-O Turkey Store division, which saw sales climb 11% in the August-October quarter of 2014 from the same period a year earlier. In the latest quarter, Hormel generated a mere 5% of its sales overseas.
The stock’s yield isn’t huge, but Hormel has raised its dividend for 49 consecutive years, including a 25% hike in November. One short-term negative: The stock trades at 21 times estimated earnings for the fiscal year that ends in October, near the high end of its range for the past two decades.
McCormick & Co.
- Share price: $71.86
Market capitalization: $9.3 billion
Yield: 2.2%
Headquarters: Sparks, Md.
Down market total returns:
2000-02 bear market: 71.5%
2007-09 bear market: -14.2%
2011 correction: -8.0%
When the going gets tough, smart investors spice up their portfolios with McCormick (MKC). Consumer purchases account for roughly 60% of sales at the giant spice maker. Food manufacturers and restaurants make up the rest, so even as fewer people eat out during hard times, demand from home cooks helps prop up business. For example, in the fiscal year that ended in November 2008, which occurred during the Great Recession, McCormick’s earnings expanded 12% from the previous year.
McCormick is not without its challenges. It faces increased competition from private-label firms, and a strong U.S. dollar could hurt results—overseas sales account for about one-third of total revenues. The stock trades at 20 times estimated earnings for the fiscal year that ends in November, compared with its average 10-year forward price-earnings ratio of 18, according to Citi Research. On the plus side, McCormick has raised its dividend for 29 straight years, most recently in November, with a hike of 8%.
Ross Stores
- Share price: $93.66
Market capitalization: $19.5 billion
Yield: 0.9%
Headquarters: Dublin, Calif.
Down market total returns:
2000-02 bear market: 79.2%
2007-09 bear market: 10.1%
2011 correction: 4.3%
A bear market killer, Ross (ROST) is the only stock on our list that was in the black in each of the past three downturns, a remarkable accomplishment. Plus, Ross, the largest off-price apparel and home-goods chain in the U.S., is a pure domestic play. The company has been doing brisk business as budget-conscious consumers hunt for deals. Over the past decade, earnings have increased by an annualized 18.2%. And since initiating a dividend in 1994, Ross has boosted it every year.
Analysts at Canaccord Genuity, a Canadian investment bank, believe Ross’s sales and earnings growth will start to slow in coming years. But lower gasoline prices could give Ross shoppers more spending power, and analysts on average still expect profits to climb a comfortable 10% in the fiscal year that ends in January 2016.
Southern Company
- Share price: $52.17
Market capitalization: $46.9 billion
Yield: 4.0%
Headquarters: Atlanta, Ga.
Down market total returns:
2000-02 bear market: 137.9%
2007-09 bear market: -22.7%
2011 correction: 8.9%
Like Con Ed, this utility derives all of its profits and revenues in the U.S. Southern (SO) provides power services to more than 4.4 million customers in Alabama, Florida, Georgia and Mississippi. Strong economic performance in the South is helping boost earnings, which are projected to grow by 3.3% annually for the next few years. Although two projects, a nuclear power plant in Georgia and a clean-coal facility in Mississippi, are pressuring earnings over the short term because of cost overruns, they should boost Southern’s results down the road. Meanwhile, says Argus Research, dividends should climb 3% to 3.5% a year over the next few years, helping to prop up Southern’s generous yield.
Wal-Mart Stores
- Share price: $86.82
Market capitalization: $279.8 billion
Yield: 2.2%
Headquarters: Bentonville, Ark.
Down market total returns:
2000-02 bear market: -4.0%
2007-09 bear market: 7.4%
2011 correction: -4.2% - Wal-Mart’s (WMT) low prices look especially appealing when the economy is stumbling. For the fiscal year that ended in January 2009, the discount retailer’s sales grew 3.5% at U.S. locations open at least a year. In comparison, same-store sales at Target (TGT), a higher-end competitor, fell 2.9% for the same period. In the quarter that ended last October, Wal-Mart generated 29% of its sales outside of the U.S.
Wal-Mart must defend its turf from a growing number of online retailers and discount chains. But low gas prices will pad the wallets of shoppers and help boost Wal-Mart’s earnings, which analysts estimate will expand by 4.8% in the fiscal year that ends in January 2016. That’s up from an estimated 2.2% increase for the current fiscal year.
