The S&P 500’s 30% plunge in the past month, the fastest in the stock market history, has created buying opportunities for both retail and wealthy investors.
Some of the world’s wealthiest people have spent more than $1 billion combined to boost their stakes in companies as markets around the world tanked amid the coronavirus pandemic, according to a report in Bloomberg.
Activist investor Carl Icahn increased his holdings in Hertz Global Holdings (NYSE:HTZ) and Newell Brands (NASDAQ:NWL), while Warren Buffett’s holding company added shares of Delta Air Lines (NYSE:DAL), according to regulatory filings.
These corporate executives will have their own reasons for buying these stocks in which they already own large shareholdings, but the field is also open for small investors who want to take a long-term approach to their investing.
Tested Strategy
One tested strategy to take advantage of this massive readjustment in markets is to buy the shares of companies that are cash rich, have a history of dealing with recessions and pay regular dividends. In other words, buying solid dividend-growth stocks is one of the safest ways to play this weakness for risk-averse investors.
The companies to focus in this category are those which have at least boosted their dividends in each of the last 10 years, the ones known as “dividend aristocrats.” These stocks have beaten the broader market and outperformed those stocks that simply have a high dividend yield, according to a recent note by Credit Suisse.
“Dividend aristocrats have outperformed the market by 12% over the last 3 years. The group has also strongly outperformed a simple strategy of buying just high yielding stocks,” the note said.
Let’s take the example of health-care stocks that are considered defensive because health insurers, pharmaceutical companies and medical-device makers generally perform better in times of economic uncertainty.
Medtronic (NYSE:MDT) is one such stock which is well-positioned to not only beat the market in this downturn, but also provides good sustainable returns.
Medtronic is a less well known healthcare stock that we like due to the company’s strong market position and its hefty payouts. The world’s biggest medical device maker controls 50% of the global pacemaker market. It’s also a leader in products that assist with spinal surgeries and diabetes care.
No matter in which direction the economy goes, stocks like Medtronic will continue to churn out cash. The company has a long-term strategy to pay out 50% of its free cash flow to shareholders as dividends. The company pays $0.54 a share quarterly payout, with an annual dividend yield of 2.9%. During the past 5 years, the average dividends per share growth rate was 12.90% per year. The shares closed yesterday's session at $79.22.
Coca-Cola Company (NYSE:KO), the world’s largest beverage company, is another solid dividend growth stock. The company owns or licenses more than 500 soft drinks including sodas, bottled water, juices and iced teas, sells its products in more than 200 countries and has 21 individual brands that generate $1 billion or more in annual sales such as Sprite, Minute Maid and Fuze Tea. It's also the market leader across a number of its core product categories.
The company has been able to increase its dividend for 56 years in a row. That's more than enough proof of the strength of the brand as well as the company’s ability to perform during recessions, market downturns and changing consumer preferences.
Earlier this year, Coca-Cola boosted its annual dividend by 2.5% to $1.64 a share. The stock closed yesterday at $41.83. With an annual dividend yield of 3.66%, KO shares are ideal for those who want to earn growing dividends and have a long-term investment horizon.
Bottom Line
Healthcare and consumer staple stocks, such as KO and Medtronic, are dividend growth stocks that could outperform the broader market if we’re in for a deep recession in 2020. Diversifying your portfolio with defensive stocks that pay regularly growing dividends is always a good strategy in times of economic turmoil.