Investing.com | Jul 02, 2020 08:36
Even during the worst economic downturns, wars or faminine, investors have relied on Wall Street's top dividend-paying companies to provide a steady stream of fixed income. And they've rarely been disappointed.
But the COVID-19 pandemic has changed that dynamic. Companies are now facing an unprecedented loss of revenue, as they are forced to shut businesses globally in tandem with social-distancing guidelines that depress consumer demand.
In this highly depressed fiscal environment, many previously stalwart dividend-paying companies have been forced to decrease, eliminate, or suspend their payouts as they struggle to preserve cash.
As we enter the second-half of 2020, the virus continues to spread and in the US, some states are pausing their reopening plans.
To help investors navigate this unpredictable environment, we've put together a list of three blue chip stocks we believe can withstand a severe recession due to the strength of their cash reserves, healthy balance sheets and reasonable payout ratios.
Retail giant Walmart (NYSE:WMT) has shown bona fide resilience during the current crisis, providing investors a refuge when many other income-producing companies watched sales erode. Wall Street analysts expect double-digit gains in the company's share price over the next 12 months, according to the average price target calculated by FactSet. The stock closed yesterday at $119.69 leaving it flat for the year.
Last week, UBS upgraded Walmart’s stock to buy from neutral, citing greater productivity, fast growth in e-commerce, and the retailer's acceleration of technology deployment. “WMT offers the prospect of best-in-class consistency in an uncertain environment,” the note said.
The world’s largest brick-and-mortar retailer also has an impressive track record when it comes to returning cash to investors. Early this year, the Bentonville, Arkansas-based colossus announced a 4% increase in its quarterly dividend to $0.54 per share, for a 1.8% yield.
With this boost, Walmart has raised its dividend every year for the past 46 years. A regularly increasing income provides a good hedge and protects the value of your investment from erosion by inflationary pressures.
With a payout ratio of 50%, the retailer is a safe dividend bet, especially when the company is succeeding in its plan to attract more online customers as it face usp to the growing competitive threat from Amazon (NASDAQ:AMZN).
Many investors think of Microsoft (NASDAQ:MSFT) as a pure technology stock that's still in growth mode, a good bet for quick gains. In our view, however, Microsoft is also one of the safest income stocks available, even during the current health crisis.
The tech behemoth is benefiting from a perfect convergence of fundamental circumstances: a surge in technology investments, its foray into cloud computing and the strength of its core Office products. But analyze Microsoft more deeply, and it becomes clear it's also a great cash cow business, with a durable advantage over its competitors.
The company has an 82% share of the desktop operating system market, generating massive amounts of recurring cash via licensing fees. Plus Office, which is now a subscription-based service for Microsoft’s millions of home and corporate users, continues to be a powerful driver of earnings.
If you're an income investor, you need to find companies like Microsoft to stash in your portfolio. These are the giants that have the power to defend their businesses and pay you for the rest of your life no matter how uncertain things get.
And Microsoft has an excellent track record when it comes to rewarding investors. Since 2004, when it first began paying a dividend, the company’s payout has swelled nearly five times.
Dividend growth has been supported by a very low payout ratio, just 34.67% and strong underlying businesses. The stock, which has an annual yield of 1%, closed at $204.70 yesterday. Microsoft pays a quarterly dividend of $0.51 per share.
Though the yield may look small to some investors, don’t forget that Microsoft continues growing, so the value of its shares offer great upside potential as well. Including dividend payments, Microsoft has delivered 361% in total returns over the past five years. Clearly, this tech giant has plenty of room to expand its capital-return program.
Consumer staple powerhouse Procter & Gamble Company (NYSE:PG) is another dependable income generator come thick or thin. The stock, which closed yesterday at $119.98, currently yields 2.65%. The Cincinnati, Ohio-based company has increased its dividend payout for 61 consecutive years, a track record few companies can match.
This consistent dividend growth also shows how powerful the company’s cash-flow generation is. P&G's range of products, which includes such globally recognized brands as Pampers diapers, Tide laundry detergent, Mr. Clean homecare products, Vicks cold and flu meds and Charmin toilet paper, is strong enough to sustain revenue growth through wars, recessions and market downturns.
Analysts predict double-digit gains for the stock in the next 12 months, as the consumer giant benefits from increased demand for pharmaceutical and hygiene products. For the first quarter, P&G reported its biggest jump in sales in the U.S. in decades.
According to management, the consumption of its products is not likely to dissipate even if consumers alter their health, hygiene and cleaning behavior.
With a pay out ratio of 66%, the company has enough runway to continue growing its income stream for investors. Over the past decade, P&G's dividend has doubled to $0.79 per share quarterly.
Written By: Investing.com
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