The bull market that started in October of 2022 has driven the S&P 500 higher by more than 60% since those October lows. The index is up about 24% year to date.
The rally has also broadened out to include a lot of unloved segments of the market. Small-cap stocks, for example, are now trading at new all-time highs.
That said, there are still risks out there. The two wars aren’t ending and could escalate at any time. There are plenty of questions about what the incoming administration could mean for investors.
And interest rates have been moving higher on the perceived stronger economy and fears of a resurgence in inflation. The benchmark 10-year Treasury has spiked to 4.4% from about 3.6% in mid-September. The ideal situation would be an economy weak enough to prompt lower interest rates but nowhere near a recession.
Stocks are also expensive. After averaging about 30% a year for the last two years, versus the long-term average of 11%, valuations on the S&P are getting stretched. Although bull markets rarely end after two years because of valuation, returns could be far milder going forward.
If that’s the case, it could bode well for conservative dividend stocks, as the dividends account for a greater portion of total returns.
Plus, many conservative dividend stocks have had a rough time for most of the last two years. But these stocks are much more cheaply valued than the overall market and now have some momentum.
3 Conservative Dividend Stocks for an Uncertain Market
Brookfield Infrastructure Corporation (BIPC)
Yield: 3.7%
BIPC is stock representing shares in the same entity as the original Brookfield Infrastructure Partners (BIP), except that instead of a Master Limited Partnership BIPC is in the form of a regular corporation.
Bermuda-based Brookfield Infrastructure Corporation owns and operates infrastructure assets all over the world. The company focuses on high-quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry.
Infrastructure, the basic physical structures and facilities needed for the operation of a society or enterprise, includes things like roads, power supplies and water facilities. Not only are these some of the most defensive and reliable income-generating assets on the planet but infrastructure is rapidly becoming a timelier and more popular subsector.
Brookfield has been successfully acquiring and managing these properties for more than a decade in a way that delivers for shareholders. Since its IPO in 2008, the original BIP has provided a total return of 840% (with dividends reinvested) compared to a return of 475% for the S&P 500 over the same period. And those returns came with considerably less risk and volatility than the overall market.
Brookfield operates a current portfolio of over 1,000 properties in more than 30 countries on five continents. The company operates four segments: Utilities (30%), Transport (30%), Midstream (30%) and Data (10%).
The dividend is rock solid with a low 70% payout ratio and a history of steady growth, The payout has grown by a CAGR (compound annual growth rate) of 10% per year since 2009 and the company is targeting 5% to 9% annual growth going forward.
Realty Income (O)
Yield: 5.6%
Realty Income (O) is one of the highest-quality and best-run REITs on the market. Cash flow from a conservative portfolio of 6,500 properties has enabled the company to amass a phenomenal track record of paying dividends—to such an extent that Realty Income actually has the audacity to refer to itself as “The Monthly Dividend Company.”
Despite trouble at a very small percentage of its properties (namely movie theaters and fitness centers), the REIT actually grew year-over-year revenues during the pandemic. The stock has been unjustifiably held back because of its association with retail properties. As a result, the stock is still trading below pre-pandemic highs.
But investors should warm to one of the best income stocks ever as the economy improves. Here are some things to like about this stock.
- 15% average annual total return since 1994
- 649 consecutive monthly dividends
- 5% annual dividend growth since 1994
- Sky-high credit ratings
UnitedHealth Group Incorporated (UNH)
Yield: 1.4%
UnitedHealth Group is a Dow Jones component that is America’s largest insurer and one of the world’s largest private health insurers. It’s a goliath with $360 billion in annual revenues that serves 149 million members in all 50 states and 33 countries. That’s a lot of monthly insurance premiums!
The group provides services at just about every facet of the healthcare process and the full-scale operation provides a powerful alignment of incentives that helps clients control costs better than competitors, which is a massive issue in the industry.
It’s also a huge company and operation. Scale is hugely important in this industry. It enables UnitedHealth Group to keep costs down by virtue of volume, have cash for acquisitions, and wield significant power to adjust rates as prices increase.
UNH currently pays a quarterly dividend of $2.10 per share or $8.40 annualized, which translates to a 1.4% yield at the current price. The payout is well supported with just a 30% payout ratio and the dividend is likely to grow. In fact, the quarterly payout has grown 94% over the past five years, from $1.08 in 2019 to the current $2.10.
UnitedHealth Group is a large, safe business that provides stability in uncertain markets. UNH has a long track record of outperforming the market index with far less volatility and beta of just 0.6.