Investing

3 Standout Dividend Stars to Recession-Proof Your Portfolio

Rich Duprey

Published: November 29, 2024 10:57 am

Donald Trump’s election victory sent the stock market soaring to new heights as the promise of tax cuts, deregulation, and a business-friendly environment caused a wave of euphoria. Yet there is still two months before he takes office and a lot can happen between now and then. 

After two cuts to interest rates, Federal Reserve chairman Jerome Powell recently said the central bank is no longer “in a hurry to lower interest rates.” China’s economy is also dramatically slowing causing a drop in energy prices. While that’s good for consumers, it’s not so good for oil and gas companies. 

Recently the Biden administration authorized Ukraine to use U.S.-supplied long-range missiles to hit targets deep inside Russia, a provocation at the end of the president’s term that needlessly escalates the stakes in the war. Similarly, it would allow Ukraine to use anti-personnel mines, something 150 countries have banned because of the civilian casualties they cause.

So there is still a lot that can happen between now and Jan. 20 that could quickly send the economy and the stock market crashing. Besides, it is always prudent to employ a buffer in your portfolio for such calamities, and these three stellar dividend stocks are just the thing you need.

24/7 Wall St. Key Points:

• While the stock market continues to hit new heights, the risk of a recession grows.
• Inflation is creeping back up, the Federal Reserve may not be cutting interest rates any longer, and China’s economy is slowing, suggesting now is the time to protect your portfolio.
• Sit back and let dividends do the heavy lifting for a simple, steady path to serious wealth creation over time. Grab a free copy of “2 Legendary High-Yield Dividend Stocks“ now.

Waste Management (WM)

It’s said the only two things we can count on is death and taxes. I’d argue that in modern society, garbage is pretty much a certainty, too. For that reason, Waste Management (NYSE:WM) is a stock you should consider to protect your portfolio in a recession. 

Waste Management is the country’s largest trash hauler. It is also the largest owner of landfills, too. That gives it an unmatched competitive advantage because no other company will be able to build out the same level of infrastructure for handling waste disposal. As it provides an absolutely essential service, its business is solid and durable.

The garbage collector has strong fundamentals to back it. Revenue and earnings have steadily grown over time as it has consistently bought back shares. Its dividend has doubled over the past 10 years, growing from $1.46 per share in 2013 to $3.00 per share today. The free cash flow payout ratio of 62% means the dividend is secure while it produces sufficient FCF to support the payout, which yields 1.4% annually.

Altria (MO)

Tobacco giant Altria (NYSE:MO) is the second stock to consider for a recession-proof portfolio. The owner of the Marlboro brand of cigarettes has paid a dividend for over 100 years while increasing the payout for more than 50 years, making it a Dividend King.

Because tobacco and cigarettes are mature (albeit declining) industries where you are not likely to see significant share price appreciation, management has opted to reward shareholders in other ways. Altria’s management has committed to return as much as 80% of its earnings to investors. That means its dividend’s FCF payout ratio of 74% is not a problem, but rather a feature.

Whereas MO stock has generated gains of just 14% over the last decade, including dividends, its total return rockets to nearly 115%.

And though smoking is in a secular decline, it still has millions of customers. Marlboro alone has a 42% share of the cigarette market. Altria is also vying for share in the reduced-risk market with its NJOY brand of electronic cigarettes and on! brand of nicotine pouches. There are more than just a few puffs left in this cigar stub and its ability to have customers return again and again despite routine price increases means this profit-making machine will continue rewarding shareholders. 

Schwab U.S. Dividend Equity ETF (SCHD)

Instead of looking for individual dividend stars to buy, why not just buy a basket of them? The Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) is an exchange-traded fund with about 100 stocks in its portfolio seeking to match the returns of the Dow Jones U.S. Dividend 100 Index. 

That makes SCHD a very low-cost way to get exposure to some of the best dividend stocks on the market. Its top three holdings are Home Depot (NYSE:HD), Verizon (NYSE:VZ), and Blackrock (NYSE:BLK). The strategy has also allowed the ETF to have a phenomenal track record of growing its own payout.

Over the last 10 years, SCHD has increased its dividend at a compound annual growth rate of 11% over the last decade, but recently hiked it by 15%. While the amount will fluctuate quarter-to-quarter, year-over-year it continuously rises.

Because of the quality companies with sustainable dividends  it owns, it gives you instant diversity across a broad cross-section of the market. It is an excellent stock to own for any investor looking to provide a recession buffer in their portfolio.