At a time when many highly rated companies are reducing their dividends to survive the economic threat of the COVID-19 pandemic, investors with savings in fixed income equities are facing a greater degree of tax uncertainty.
In the past four weeks, a wave of prominent megacaps in various sectors has either suspended or drastically reduced their dividends. Those market leading companies include Boeing (NYSE :), Ford (NYSE 🙂 and Royal Dutch Shell (NYSE :).
While corporate payouts are likely to drop 25% this year, according to an estimate by Goldman Sachs, there are still some segments of the market that will weather the trend. We have shortlisted three dividend stocks for income-oriented investors. Each is considered a safe choice because of their ample cash reserves, healthy balance sheets and reasonable payout ratios.
1. Procter & Gamble
Consumer supplies are a market area considered as a haven for investors when the risk of recession increases. The logic here is simple: While spending on holidays and other luxury items is cutting, consumers are very unlikely to stop buying things they absolutely need for everyday life, such as toothpaste and dish soap.
PG Weekly 2017-2020
Procter & Gamble (NYSE :), the multinational consumer staple maker, is a stock we recommend when volatility drives markets and investors seek slow but steady capital growth with reliable, regular dividend payments. The company posted a 6% increase in the first quarter of this year, helped by a booming demand for Charmin towels and Bounty paper towels amid the COVID-19 that spurred the increase in purchases prior to closing.
The stock yields 2.73% per year. P&G is among that small group of companies considered to be dividend aristocrats – companies that have consistently raised their dividends for 25 years or more and successively. In the case of Procter & Gamble, that stat is even more impressive: The Cincinnati-based company has paid dividends for nearly 130 years, increasing that payout for 63 consecutive years. It now pays $ 0.79 per quarter, up 6% from last month.
P&G shares have fallen nearly 8% this year through Wednesday. Still, the stock outperforms the S&P 500 Index, which fell 11.3% in the same period.
2. Cisco Systems
Cisco (NASDAQ 🙂 is a cash-rich technology player, making it well positioned to continue paying dividends during this economic crisis .
CSCO Weekly 2017-2020
The San Jose-based network giant is the world's largest producer of routers, switches, and other equipment that companies use to connect computers. While the cyclical nature of this segment of the hardware market may continue to depress the performance of Cisco & # 39; s stocks, it is still difficult for companies in all segments to delay their capex investments indefinitely, including for products that are so critical for their technical infrastructure.
Another reason why we are quite optimistic about Cisco's ability to pay dividends: the company's aggressive diversification is drifting from hardware to a software-driven model within new, fast-growing areas of the market such as cybersecurity, applications and services.
Under Chief Executive Officer, Chuck Robbins, Cisco has made a series of acquisitions to build a software and services company. Last year, Cisco bought Voicea, a maker of software that provides real-time transcription and voice search functions, from the company. In July, it agreed to acquire Acacia Communications (NASDAQ 🙂 for approximately $ 2.6 billion and acquire chips and machines that help convert optical signals into electronic data.
These growth initiatives, combined with the company's dominant position in the Americas region, where it generates the most sales, have helped the company perform better as macroeconomic risks decline.
In addition to growth, Cisco is also a reliable dividend payer. While not yet considered an aristocrat, since it has only paid dividends for 11 years, Cisco has increased the payout every year, making it an attractive option for those looking for a growing income. With a current annual return of about 3.5%, investors will receive a quarterly payout of $ 0.36 per share, which has risen by 14.20% annually over the past five years. In addition, the payout ratio on Cisco's dividend is 50%, meaning that there will be much more room for dividend increases in the future.
3. Merck & Company
Healthcare stocks are considered solid income producers. Like retailers, utilities and garbage collectors, healthcare providers offer services that remain necessary even in a recession. Moreover, economic fluctuations do not usually inhibit the rollout of new drugs and equipment.
MRK Weekly 2017-2020
Stocks like Merck (NYSE 🙂 are well positioned to not only beat the market in a recession, but also offer good sustainable returns. The company is currently benefiting from the success of its best-selling cancer drug Keytruda. Analysts expect Keytruda to reach $ 20 billion annually by 2023, according to FactSet, generating more than a third of total revenue by that time.
The drug manufacturer reported an 11% sales increase last week, driven by strong growth in Keytruda.
With strong earnings momentum, a growing dividend and share buybacks, we believe the company is a good long-term bet for those looking to see increasing payouts. The stock currently delivers 3%, via a quarterly dividend of $ 0.61 per share. The drug manufacturer increased its payout by 11% last year. And with a below-average industry payout ratio of just 43.06%, there is a long runway for additional raises.
Bottom Line
Healthcare, consumer goods and solid technical names are three defensive areas of the market that are refuges for income-oriented investors in this market turmoil. While the stocks are unlikely to generate huge capital gains, they remain reliable sources of stable fixed income.
