Written by Bob Ciura for Sure Dividend
Fears of a recession in the U.S., and indeed, in many parts of the world, have caused immense volatility in stock markets globally in 2022. We find the preferred strategy for building long-term wealth in any market conditions to be buying high-quality dividend stocks, reinvesting dividend proceeds, and holding for the long-term. However, given the relentless selling pressure of 2022, we believe it is even more important to focus on the long-term than ever, particularly as there are numerous bargains available today.
When looking for the best dividend stocks, one can start with the Dividend Kings, a group of just 44 stocks that have all increased their dividends for at least 50 consecutive years. That level of longevity and dividend excellence puts these companies in a class of their own for income investors, and those seeking to compound wealth over time.
The Dividend Kings have another favorable trait that is particularly enticing at the moment, and that is their inherent recession resilience. Only companies that can continue to raise their dividends through even the worst recessions make to become Dividend Kings, and in this article, we’ll focus on three Dividend Kings that we expect to perform very well in any upcoming recession, and critically, continue to raise their dividends indefinitely.
Federal Realty Investment Trust (FRT)
Our first Dividend King is Federal Realty, the only REIT on the prestigious list of dividend royalty. The trust owns and operates a portfolio of high-quality retail-based properties that are based in coastal communities in the US. Federal Realty seeks out markets with dense populations and high incomes that have limited building space, the combination of which tends to keep demand – and rental prices – high over time.
The trust operates just over 100 properties that collectively have 25 million rentable square feet, about 3,200 residential units, and more than 3,000 tenants.
Federal Realty was founded in 1962, produces about $1 billion in annual revenue, and trades today with a market cap of $7.5 billion.
One would potentially think that buying a recession-safe dividend stock would exclude not only REITs, but in particular, a retail-focused REIT. However, Federal Realty has been extremely well-managed over the years, and this has led not only to sustainable growth over time, but the willingness and ability to return ever higher amounts of cash to shareholders.
Even during the COVID recession of 2020, which heavily impacted retail, Federal Realty was able to boost its payout. We don’t see any sort of reasonable scenario where the trust would be forced to cut its payout based upon how it operates today.
The stock yields an impressive 4.6% today, about triple that of the S&P 500, so from a pure income stock perspective, it is attractive. It has also raised its dividend for 54 consecutive years, easily the best among publicly-traded REITs.
Despite some marked earnings weakness in 2020 due to COVID lockdowns, Federal Realty’s payout ratio for this year is still just above 70%. Not only is that fairly low for a REIT, but it also makes the dividend quite safe, even in the event of a recession. The earnings stability Federal Realty has shown over the years – in good times and bad – is why we think its dividend is not only safe, but will continue to rise during recessions.
Kimberly-Clark Corporation (KMB)
Our next Dividend King is Kimberly-Clark, a company that manufactures and distributes personal care and tissue products worldwide. The company offers disposable diapers, baby wipes, feminine products, tissue and toilet tissue, paper towels, soaps, napkins, and other related products. The company was founded in 1872, generates $20 billion in annual revenue, and trades with a market cap of $42 billion.
Like Federal Realty, Kimberly-Clark sports a very nice yield of 3.8%. The stock has sold off in 2022 so its yield is at decade highs today, offering additional value for income investors.
Kimberly-Clark’s dividend streak is 50 years, having become a Dividend King with its most recent dividend increase. Its payout ratio is somewhat elevated at 80%, which is high for most stocks. However, we believe this payout to be sustainable because Kimberly-Clark operates a consumer staples business that has very stable and predictable demand. That leads to predictable earnings, so with less earnings volatility comes the ability to commit more earnings to the dividend.
Demand for products like diapers, paper towels, and soap don’t wax and wane like consumer discretionary products, and it’s why we believe Kimberly-Clark will be able to not only pay, but raise its dividend as recessions arise.
Black Hills Corporation (BKH)
Our final stock is Black Hills Corporation, which is an electric and natural gas utility based in South Dakota. The company operates an electric utility with about 218,000 customers, with ~1,500 megawatts of generation capacity. In addition, it has about 1.1 million natural gas customers, with 4,700 miles of intrastate gas transmission pipelines, as well as storage facilities.
Black Hills was founded in 1941, produces $1.9 billion in annual revenue, and has a current market cap of $4.5 billion.
Black Hills has a current yield of 3.5%, over double that of the S&P 500, and at the upper end of the historical range for the stock. Like the other two stocks on this list, Black Hills offers income-focused investors a strong value proposition today.
Black Hills’ dividend increase streak stands at 50 years, joining Kimberly-Clark as one of the newest Dividend Kings. The company has built-in recession resistance given it is a utility, which tend to see very stable and predictable demand over time. Utilities are some of the most attractive income stocks for this reason, and Black Hills certainly fits the bill.
Dividend safety is exemplary with Black Hills with its payout ratio that is under 60%. That’s low for any dividend stock, but given the earnings stability inherent to a utility, we believe Black Hills can continue to raise its payout for decades to come.
Final Thoughts
While recessions aren’t kind to stock valuations, we believe that focusing on finding the highest quality dividend stocks can help investors sleep at night. We like Federal Realty, Kimberly-Clark, and Black Hills from the prestigious Dividend Kings list as stocks with very strong yields, high levels of earnings stability, and the ability to continue to raise their payouts, even during recessions.
