Since the end of the Great Recession, growth stocks have pretty much left everything else eating their dust. But pan out over the very long-term and you'll see that dividend stocks are the real moneymakers.
In 2013, J.P. Morgan Asset Management released a report that compared to performance of companies that initiated and grew a dividend to companies that didn't pay a dividend over a four-decade stretch (1972-2012). Unsurprisingly, the dividend-paying stocks obliterated the non-dividend payers with an annual average return of 9.5%, compared to 1.6% for the non-payers. I say "unsurprisingly" because dividend stocks are often profitable, time-tested, and have clear long-term outlooks. They're beacons of profitability for investors, and they're the perfect place to consider putting your money to work when a stock market crash strikes.
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Stock market crashes and steep corrections are inevitable
I know I just said the three scariest words any investor can hear -- stock market crash -- but history tells us that the likelihood of a crash or steep correction is high.
For example, the S&P 500's (^GSPC -1.05%) Shiller price-to-earnings (P/E) ratio -- a measure of inflation-adjusted earnings over the previous 10 years -- hit 37.5 on June 16, 2021. To put this into some perspective, the average reading over the past 151 years is about 16.8. The real concern, though, is that in the previous four instances where the S&P 500's Shiller P/E ratio surpassed and held 30, the S&P 500 has subsequently declined by at least 20%.
Want more evidence? Following each of the previous eight bear-market bottoms (i.e., not counting the coronavirus crash of 2020), there were one or two double-digit percentage declines within three years. No matter how slow or fast the recovery, no bull-market rebound is without a double-digit hiccup. We've yet to see that double-digit decline in the benchmark S&P 500, and we're 15 months removed from the pandemic bottom.
History also tells us that double-digit declines are common. Since 1950, we've had an official correction in the S&P 500, on average, every 1.87 years.
Buying high-quality dividend stocks can help you "weather the storm"
The great thing about dividend stocks is their payouts help to hedge against this inevitable short-term downside in equities. And, as noted, these are usually time-tested businesses that aren't going to be disrupted by economic hiccups.
Stock market crashes and corrections are inevitable. When the next crash does occur, consider buying the following three dividend stocks to ride out the storm.
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Johnson & Johnson
Buying "boring" stocks isn't a bad thing. On Wall Street, boring is synonymous with businesses that are predictable and highly profitable. That's why healthcare conglomerate Johnson & Johnson (JNJ 1.35%) is such a smart dividend stock to buy during a market downturn.
One of the most interesting things about Johnson & Johnson (also known as J&J) is that it's one of only two publicly traded companies to hold the highly coveted AAA credit rating from Standard & Poor's. In layman's terms, S&P has more faith in J&J repaying its outstanding debts than it does in the U.S. federal government (AA rating) making good on its debts.
What makes Johnson & Johnson so special is the company's three puzzle pieces working in unison. For instance, the company's consumer healthcare products division is slow-growing, but it provides highly predictable cash flow and strong pricing power. There's also J&J's leading medical devices segment, which is growing modestly at the moment, but is positioned perfectly to take advantage of procedures as the U.S. and global population ages. Lastly, J&J generates the bulk of its growth and margin from pharmaceuticals. On the flipside, brand-name drugs have a finite period of exclusivity. All of J&J's segments have worked together to deliver adjusted operating earnings growth in nearly every year over the past four decades.
This is also a good time to mention that healthcare stocks are highly defensive. No matter how well or poorly the economy is performing, people get sick and need prescription medicines and medical devices. This provides a baseline level of demand that investors can count on from J&J.
The icing on the cake is that J&J has increased its base annual payout for 59 consecutive years. You can pretty much count on two hands how many publicly traded stocks have a longer active streak of increasing their base annual payout. Suffice it to say, Johnson & Johnson's 2.6% yield and its predictable operating model can (pardon the pun) pay dividends during a stock market crash.
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Annaly Capital Management
I beat the drum on ultra-high-yield dividend stock Annaly Capital Management (NLY 0.86%) a lot. That's because its track record shows it can generate a boatload of income for investors, as well as hedge against the inevitable downside that occurs in the market when investing for the long term.
Annaly Capital is a mortgage real estate investment trust (REIT). Without digging too far into the weeds, this means Annaly borrows money at lower short-term lending rates and uses that capital to buy assets (mortgage-backed securities) with higher long-term yields. The difference between the higher long-term yield and lower short-term borrowing rate is known as the net interest margin. The wider the net interest margin, the higher the profit margin for mortgage REITs. Also, since REITs avoid normal corporate income tax rates, the wider the net interest margin, the more shareholders are going to get paid in dividends.
What makes Annaly so intriguing right now is the pace of the U.S. economic recovery. In the early stages of a recovery, it's normal to see the yield curve steepen -- i.e., long-term Treasury bond yields rise while short-term bond yields flatten or fall. When this happens, Annaly's net interest margins widens. In short, we're in the period where mortgage REITs outperform.
To make things even better, Annaly Capital Management almost exclusively buys agency-backed securities. Agency assets are backed by the federal government in the event of default. This added protection does lower the long-term yield Annaly nets on its purchases, but it also allows the company to use leverage to its advantage to pump up profits.
For the past two decades, Annaly has averaged about a 10% annual yield. That would go a long way to partially offsetting a short-lived crash or correction, and calm investors' nerves.
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Duke Energy
Yet another "boring" stock that would be perfect to buy if the stock market crashes is electric utility Duke Energy (DUK 2.55%).
If you thought healthcare was a defensive sector, you haven't seen anything till you take a deeper dive into electric utilities. That's because virtually all homeowners need gas or electric service, and demand for these services doesn't fluctuate much. This cash flow predictability is a big reason behind the juicy yields electric utilities pay their shareholders. In Duke's case, we're talking about a 3.8% dividend yield, which nearly triples the current yield of the S&P 500 (1.3%).
The most exciting development for Duke is the $58 billion to $60 billion it's outlaid for (mostly) renewable energy projects between 2020 and 2024. The company has suggested it'll up its infrastructure spending on clean energy to between $65 billion and $75 billion for the 2025-2029 period. While costly upfront, these renewable energy projects help to drive down electric generation costs, which in turn will boost Duke's compound annual growth rate. It'll also help the second-largest electric utility by market cap stay ahead of any green-energy legislation that might come out of Washington.
Investors should take note that Duke's traditional utility services (i.e., those not powered by renewable energy sources) are regulated. Some folks might see regulation as a pain in the behind. For instance, Duke can't simply pass along price hikes whenever it wants. However, regulation by state public utility commissions also means no exposure to potentially volatility wholesale pricing. Again, it's all about cash flow predictability.
Duke Energy isn't going to knock anyone's socks off when it announces its operating results every three months. But it will be a steady rock in investors' portfolios if stock market volatility picks up in a big way.
