In three series of articles, we will have an in-depth look at the best defensive dividend stocks helping you to identify some solid dividend stocks with stable earnings and consistent dividend payments. This is part one of three.
In brief:
- Defensive dividend stocks often provide stable returns regardless of inflation and economic turmoil.
- They could help you to reduce your portfolio’s volatility, a lower beta.
- Defensive stocks are typically well-known brands and so-called value stocks.
- They typically offer higher dividend yields than treasury bills.
What is a defensive dividend stock?
A defensive dividend stock is a stock that provides consistent dividend income, stable earnings, and provides consistent returns even during an economic recession or stock market downturn. Conservative and retirement investors often invest in defensive dividend stock to generate income while the lower volatility gives some kind of “peace of mind” as well.
Defensive stocks typically have strong cash flows and products or services that have constant demand and are usually found in one of the following four sectors:
- Utilities: companies active in electric, gas, water, and waste. For example Atmos Energy (ATO) or Waste Management (WM)
- Consumer staples: includes manufacturers and distributors of food, beverages, and tobacco. For example Coca-Cola (KO) or Procter & Gamble (PG)
- Healthcare: companies active in healthcare. For example Johnson & Johnson (JNJ)
- Telecom: consists of companies that transmit data in words, voice, audio, or video across the globe, so AT&T (T).
Those four sectors continue to operate “as usual” through economic downturns, allowing the companies to generate sufficient cash flows to maintain dividend payouts.
The main advantages of defensive dividend stocks are their stability with respect to lower volatility than the overall stock market and outperformance during economic decline. Furthermore, dividend growth could provide some inflation protection as well. On the flip side, the mentioned advantages will in most cases result in underperformance in periods of strong economic growth.
Defensive dividend stocks and Beta
A typical characteristic of defensive stock is a beta below one. Beta measures the responsiveness of a stock’s price to changes in the overall stock market (volatility). A stock with a beta of 0.7 has experienced gains and losses that are 70% of the benchmark’s changes. For example, Johnson & Johnson (JNJ) has a beta of 0.71 and Coca-Cola (KO) around 0.6 at the moment of writing.
Three Defensive dividend stocks to consider
The following section lists the three best defensive dividend stocks to consider. They are selected on two key ratios. These three stocks represent attractive long-term buys for defensive dividend growth investors combining a high dividend growth rate with a better earning per share rate of the past 10 years.
The two key ratios are 1) dividend growth and 2) payout ratio. You might think this approach not so special, there are better and more sophisticated methods. However, the best stocks are selected based on a growing dividend and declining dividend payout ratio, meaning that the company has the ability to grow its earnings per share than its dividend growth.
There are three best defensive dividend stocks:
#1 The Sherwin-Williams Company (SHW)
| The Sherwin-Williams Company | |||
| Ticker | SHW | Dividend Yield |
0.78% |
| Sector | Basic Materials |
Dividend | $ 2.20 |
| CAGR Earnings per Share (10Y) |
19.5% | Payout ratio |
25% |
| CAGR Dividend per Share (10Y) |
13.8% | Beta | 0.98 |
| CAGR Payout ratio (10Y) |
-4.7% |
The Sherwin-Williams Company develops, manufactures, distributes, and sells paints, coatings, and related products and is North America’s largest manufacturer of paints and coatings. The company distributes its products through wholesalers as well as retail stores to over 100 countries. Sherwin-Williams has been able to increase dividends for 43 consecutive years. Sherwin-Williams 2021 guidances, is anticipating $8.80 to $9.07 in adjusted earnings-per-share.
Below you will find the detailed data per year on earnings per share (EPS), dividend per share (DPS), outstanding shares in millions, and the payout ratio. Most important are the compound annual growth rates (CAGR) for the past 10 years.
#2 Lowe’s Companies (LOW)
| Lowe’s Companies | |||
| Ticker | LOW | Dividend Yield |
1.25% |
| Sector | Consumer Cyclical | Dividend | $ 2.40 |
| CAGR Earnings per Share (10Y) |
18.0% | Payout ratio |
26% |
| CAGR Dividend per Share (10Y) |
16.1% | Beta | 1.34 |
| CAGR Payout ratio (10Y) |
-1.6% |
Lowe’s Companies was founded in 1921 and is the second-largest home improvement retailer in the US after Home Depot. Lowe’s Q1-2021 earnings were strong with sales growth at 26% and operating income jumped to 13% of sales this quarter compared to 10% last year. Lowe’s spent over $3 billion on stock buybacks in Q1, combined with $440 million on dividend payments. Between 2011 and 2020 Lowe’s grew its earnings-per-share by 18% a year, while dividend-per-share grew by 16.1%, resulting in a very strong and stable payout ratio of 26%.
#3 T. Rowe Price Group Inc. (TROW)
| T. Rowe Price Group Inc. | |||
| Ticker | TROW | Dividend Yield |
2.25% |
| Sector | Financial Services | Dividend | $ 4.32 |
| CAGR Earnings per Share (10Y) |
12.6% | Payout ratio |
36% |
| CAGR Dividend per Share (10Y) |
11.2% | Beta | 1.18 |
| CAGR Payout ratio (10Y) |
-1.2% |
T. Rowe Price Group, Inc. is a publicly owned investment/asset manager. The firm provides its services to individuals, institutional investors, retirement plans, financial intermediaries, and institutions. It launches and manages equity and fixed income mutual funds and was founded in 1937. On April 29th, 2021 T. Rowe Price reported Q1 2021 strong results, assets under management (AUM) came in at $1.518 trillion, up 50.5% compared to Q1 2020. T. Rowe Price’s earnings, as well as its dividends, have grown substantially over the last decade. Between 2011 and 2020 T. Rowe Price’s grew its earnings-per-share by 12.6% a year, while dividend-per-share grew by 11.2%, resulting in a very strong and stable payout ratio of 36%.
Final thoughts
Defensive Dividend stocks can help you preserve wealth and protect yourself against losses during a recession. The main criteria used in this article, dividend growth and earnings per share growth which is higher than dividend growth, identified some interesting stocks. One should note that the outcome of this method delivered three interesting stock which are not active in a “defensive sector”.
