We believe the best way to accrue wealth over the long-term is to find high-quality dividend stocks, hold for long periods, and reinvest dividends in additional shares over time. This strategy is simple, but very effective when it comes to investors gradually building wealth over their lifetime.
However, if the investor selects poor stocks, the buy-and-hold strategy for the long-term doesn’t work; we need companies that have sustainable advantages, and therefore, the ability to continue to raise their dividends to shareholders over time.
One place to start when looking for such stocks is the list of blue-chip stocks, which is a group of high quality dividend stocks that have raised their dividends for at least 10 consecutive years. This would include stocks that only began paying dividends fairly recently – such as technology stocks, for instance – and companies with much longer histories in traditional dividend sectors like utilities and consumer staples.
The list is diverse, and in this article, we’ll highlight three we think can continue to pay their dividends through a recession.
| Ticker | Company | Price |
| QCOM | Qualcomm | $120.89 |
| STT | State Street | $62.08 |
| DOV | Dover | $119.81 |
Blue-Chip Stocks: Qualcomm (QCOM)
First on our list of dividend blue-chip stocks is Qualcomm, a technology company focused on the development and distribution of components mainly used in wireless communications. This includes integrated circuits, system software, global positioning systems, and of course, components used in smartphones around the world. Qualcomm is a pioneer in 5G wireless technology, and has been a leader in that space for many years, helping to drive technological advancement over time.
The company was founded in 1985, generates about $45 billion in annual revenue, and its market cap is $149 billion.
We see growth at 7% annually for Qualcomm, which is roughly congruent with its history in the past decade. The company is somewhat beholden to smartphone upgrade cycles given its 5G-related sales, but it is diversified enough that we don’t see a recession being a significant problem. Earnings declined in the mid-teens during the last recession, but nowhere near enough to put the dividend at risk.
Revenue gains should drive earnings growth in the years to come, along with a small measure of margin expansion, as well as steady share repurchases.
Given the massive decline in Qualcomm shares thus far in 2022, we see total return prospects as excellent going forward. In total, we think buyers today could see 18% annual total returns over the coming years.
We estimate 7% earnings growth, the dividend yield is good for 2.3%, and the valuation makes up the rest with a massive 9% gain annually possible. Shares go for just 10.4 times this year’s earnings, which is well below our somewhat conservative estimate of fair value at 16 times earnings. Should the stock revert to that valuation, holders of Qualcomm would see sizable capital appreciation.
State Street (STT)
Our next blue-chip stocks company is State Street, a financial services company based in the U.S. State Street isn’t a traditional bank that focuses on deposits and lending products. Rather, it is a custodial bank, meaning it generates the bulk of its revenue from fees rather than interest on loans. State Street, therefore, primarily serves institutions such as investment firms, pension funds, insurance companies, endowments, and the like.
State Street traces its roots to 1792, making it one of the oldest banks in the U.S. It generates about $13 billion in yearly revenue, and its market cap is $24 billion.
We estimate State Street can grow earnings at 7% annually in the years to come, driven by strong fee generation, and State Street’s inherent insulation from interest rate moves that can be a boon or bust for traditional banks. The bank owns the lucrative and wildly popular SPDR exchange-traded product family, which benefit from inflows of cash into equities. The company’s other fee-generating businesses are diverse and therefore, aren’t especially susceptible to recessions.
We think State Street can provide nearly 20% annual returns from current levels, as the market has priced shares for a recession already. The dividend yield has soared to a very impressive 3.7%, so along with 7% projected growth, and a significant tailwind of almost 10% from the valuation, State Street looks quite attractive. Shares trade for under eight times this year’s earnings, which is a long way from our estimate of fair value at 12.5 times earnings, driving the tailwind.
Blue-Chip Stocks: Dover Corp. (DOV)
Our final stock is Dover Corp., which provides equipment, consumable supplies, aftermarket parts, software and support services for various industrial applications worldwide. It offers products through five segments, offering significant diversification of revenue: engineered products, clean energy and fueling, imaging and identification, pumps and process solutions, and climate sustainability technologies.
Dover was founded in 1947, generates $8.6 billion in total revenue, and trades with a market cap of $18.5 billion. Dover also holds one of the longest dividend increase streaks of any company in the world at 66 years.
We estimate 8% annual earnings growth for Dover, driven largely by revenue gains. The company buys back a very small amount of stock, but Dover’s growth is largely driven by revenue and associated margin gains. Growth has been lumpy at times in the past, but over the medium term, we expect earnings to be much higher than they are today.
Dover offers the weakest potential returns of the three stocks, but “weakest” is used in a relative sense as we still expect ~13% annual returns for buyers today. Eight percent growth, the 1.6% dividend yield, and a ~3% tailwind from the valuation should see the stock produce strong total returns in the years to come.
Final Thoughts
Finding high-quality dividend stocks is always the best strategy for building wealth long-term, in our view, but that’s especially true during tough economic times, such as recessions.
We like the blue-chip stocks as a place to start screening for high-quality names, and we’ve highlighted three we like very much. All three have strong growth potential, and very reasonable payout ratios, the combination of which should see them able to pay – and even raise – their dividends into the next recession.
We have buy ratings on Qualcomm, State Street, and Dover and believe their dividends will continue to be raised regardless of whether we enter a recession or not.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.