This is a guest contribution by Tim Thomas, timthomas.co
In the months since the all-time highs reached by the US stock indices, the markets have reminded investors that at some point, what goes up will come down.
For dividend investors, a good benchmark to follow is the S&P 500 Dividend Aristocrats which index of large companies that have raised their dividends every year for the past 25 years. During a market downturn, dividend-paying stocks often prosper and during 2008 when Standard & Poor’s 500-stock index fell 37%, Dividend Aristocrats gave back a more palatable, 22%.
In the same way a housing market crash can be financially painful, stock price declines can be difficult to swallow, especially for volatile Nasdaq listed stocks. However, history has consistently shown that investing in quality stocks during corrections and bear markets pays off. While market declines pale compared to rallies that follow, investors need to keep a level head, manage their risk, and do their research.
So, a key question is: Which stocks should you buy on a dip?
High yields stocks provide a passive income, but investors should be aware of inflation; Dividend investors who once considered stocks as high yield when inflation was low would have to revise their expectations with higher inflation.
Why do stocks such as Costco Wholesale, Walmart, and Procter & Gamble maintain their all-time highs as the broader indices decline? Their balance sheets are solid, and they are all industry leaders. The three firms have unique pricing power that places them in a strong position to combat inflation.
Walmart has a simple investment thesis. Consumers will cut back on spending when prices rise, and while gas prices may be beyond their control, they can limit discretionary spending. Cost-conscious consumers are more likely to choose Walmart over Williams-Sonoma or other high-end retailers. A quick look at Walmart’s price chart compared to Williams-Sonoma is strong evidence of consumer preference.
Walmart’s stock remains relatively cheap despite outperforming the S&P 500 over the past five years by 137%. Walmart has a forward P/E ratio of 23.3. Moreover, Walmart has been paying and increasing its dividend for 47 consecutive years, making it a Dividend Aristocrat. In addition to reinvesting in its core business, the company routinely raises its dividend and purchases its stock with extra cash flow.
As a result, Walmart is now an excellent safe stock to consider due to its unique blend of upside, value, and income.
Due to recent trends, it may seem almost inexplicable that oil prices briefly fell into negative territory about two years ago. Pandemic conditions previously created a surplus of oil, to the point that existing storage capacity exceeded oil production. But since the opening of the economy and resurging demand, the trend has reversed dramatically.
The overall inflationary trend now causes a different economic worry, and rising oil prices are one cause of this trend. In one way or the other, almost industries are affected by the oil price, making it the single most significant contributor to current inflationary trends.
Many companies are facing pressure from rising costs. Still, ExxonMobil is benefiting from soaring oil prices. Due to high inflation levels, it may remain one of the most successful performers if the stock market moves into bear-market territory.
In its industry, Exxon is an industry titan, and its large-scale and diverse business model has historically permitted it to thrive even when conditions are less favorable than they are today.
Economic conditions are likely to continue shaping in a manner consistent with high inflation so that Exxon could perform better than the market. The company’s demand outlook remains favorable, even if high inflation pushes the economy into recession and businesses and consumers cut back on oil and energy usage.
Although alternative energy technologies have made some progress, trends such as the emergence of the global middle class, population growth, and the expanding worldwide economy have made oil more essential than ever before.
Despite recent valuation gains, Exxon Mobile continues to yield a substantial 4% dividend. ExxonMobil stock appears poised to beat inflation as profits climb and performance trends improve.
Abbott Laboratories (ABT)
Diagnostics, medical devices, and nutritional formulas company Abbott Labs (ABT) is profiting from the steady increase in health care needs. AbbVie (ABBV), the brand-name drugs business, was spun off in 2013.
Abbott announced last year that it would sell its generics business in developed countries but keep it in developing ones. The move will allow Abbott to target faster-growing regions. According to investment bank Barclays, an aging population and broader healthcare coverage will drive medical device sales by 2025.
Abbott has the most global exposure of the companies on this list, with 69% of its sales coming from international markets in Q3. Even with a strong dollar, company executives think the Chinese in-vitro diagnostics market will grow by more than 15% annually through 2022.
Consolidated Edison (ED)
For Consolidated Edison (ED), there will be no overseas exposure. In New York City and the surrounding area, millions of customers receive their electric and gas service through the holding company. Con Ed earns steady profits because its business is highly regulated. The firm kept raising its dividend during the financial crisis, and the company has increased its dividend for 41 years in a row.
Analysts are predicting Con Ed’s stock will grow by 1.3% in 2022, despite rising interest rates. If analysts are correct, the utility’s solar energy investments will spur modest growth. Stocks with higher yields provide extra protection from bears if the decline is severe.
Stocks of consumer goods makers do better during a market downturn. Clorox (CLX) manufactures household cleaning products and is the best example. Its brands include bleach and Glad trash bags. Thus, Clorox enjoyed annual sales growth of 4.5% from 2008 to 2010. Dividends have also been on the rise since 1977.
Recently, competition has increased pressure on segments such as bleach, disinfecting wipes, and cat litter. The company is, however, launching its products. Analysts expect more growth for the fiscal year that ends this June after sales edged down by 0.3% last year. 20% of the company’s sales come from abroad.
Even though we are not (yet) in a bear market, it is imperative to remain on high alert and seek out investments that will flourish, regardless of the market’s overall direction.