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2 Cash-Rich Dividend Stocks To Counter Growing U.S. Recession Risks

Published 05/11/2022, 09:38 AM
  • Deutsche Bank predicts the most aggressive monetary tightening since the 1980s
  • Cash-rich companies with a history of paying dividends are one of the safest areas of the market
  • Dividend stocks from industries like consumer staples and healthcare are least affected by worsening economic environment
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  • The rout in global equity markets that erased $11 trillion since the end of March is a powerful sign that the US economy heads for a hard landing in the aftermath of the Fed's ultra-supportive post-pandemic endeavor.

    According to a Deutsche Bank forecast, the Federal Reserve will likely need to undertake the most aggressive monetary tightening cycle since the 1980s to cool the current four-decade high inflation.

    Against this backdrop, Goldman Sachs calculates that the risk of the world's largest economy slipping into a recession over the next two years currently stands at about 35%.

    In such an uncertain economic environment, it's almost impossible to avoid risk in equity markets altogether, but it is possible to minimize it. The best way to do that is by diversifying your portfolio and including cash-rich defensive companies that have a history of paying dividends in both good and bad times.

    Dividend stocks from industries like utilities, telecommunications, and consumer staples, are the ones that are least affected by the worsening economic environment as consumers can't afford to cut their services.

    The resilience of their services and products make them attractive to investors who are worried the Fed won't be able to combat inflation without significantly raising unemployment.

    Below, we have shortlisted two such dividend stocks for your consideration:

    1. Coca-Cola

    The Atlanta-based food and beverage giant Coca-Cola (NYSE:KO) is an excellent recession-proof, cash-rich company that has issued dividend checks for more than a century. This impressive track record shows the strength of its brands and its ability to survive in the toughest of economic times. KO closed Tuesday at $64.01.

    KO Weekly TTM

    The latest evidence of this unique combination came last month when Coca-Cola released its first quarter earnings report. Demand for the company's beverages rebounded strongly after almost two years of the pandemic-triggered slump.

    The maker of Sprite, Fanta, and Simply reported revenue of $10.5 billion, producing a more than 18% year-over-year growth, in line with analysts' expectations.

    And Coke isn't alone. According to FactSet, almost 90% of the consumer staples companies that have reported this season have logged profits above analysts' estimates. Across industries in the index, that figure sat at almost 80%.

    As part of its push to grow beyond its namesake brand and become a "total beverage company," Coke is acquiring startup beverage companies to resonate better with health-conscious clients and find new growth areas. Its recent investments include Honest Tea, Fairlife Dairy, and Suja Life.

    Trading at $64.01 at yesterday's close, Coke's stock is yielding 2.75% annually. That return might not look too exciting, but the company has a long track record of hiking its payout—for 58 consecutive years now.

    With a 7% annual dividend growth rate over the past 10 years, KO currently pays a quarterly $0.44 a share.

    2. Pfizer

    The global pharma giant Pfizer (NYSE:PFE) is another recession-proof candidate with a lot of cash to satisfy income investors, especially after its COVID-19 global vaccine success created a permanent revenue stream to fund its dividend. Pfizer closed Tuesday at $49.49.

    Pfizer Weekly Chart

    The New York City-based company currently pays a $0.4 quarterly share dividend with an annual dividend yield of 3.29%. That averages to over 6% a year during the past five years. However, that escalation rate could improve if the company's COVID-19 vaccine becomes a regular feature with booster doses and additional types of inoculations.

    Furthermore, through mid-April, Pfizer said it had clinched $32 billion in 2022 contracts for its vaccine and $22 billion for its COVID pill, Paxlovid.

    Company officials, led by Chief Executive Albert Bourla, have said that Pfizer's mRNA vaccine looks capable of taking on new COVID-19 variants. Thus the revenue generated by inoculating global populations against COVID-19 is likely to linger well after the pandemic subsides.

    If Pfizer's sales projections prove correct, the vaccine will climb into the highest rank of blockbuster medicines, outpacing bellwethers such as AbbVie's (NYSE:ABBV) HUMIRA immunosuppressive therapy and Merck's (NYSE:MRK) cancer fighter KEYTRUDA, according to Bloomberg estimates.

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