Inflation continues to roar in the United States, and interest rates are rising as a direct result. Because of these challenges, the U.S. economy could tip into a recession. As investors likely recall from previous recessions, many high-yielding dividend stocks are likely to cut or suspend their dividends if the U.S. economy enters a downturn.
Investors can take steps now to protect their income. For starters, investors could consider high-quality dividend stocks such as the Dividend Aristocrats.
These are a group of 65 stocks in the S&P 500 that have raised their dividends for at least 25 consecutive years, among a number of other criteria. Specifically, the following Dividend Aristocrats have market-beating dividend yields, and safe dividend payouts even if a recession occurs.
| Ticker | Company | Recent Price |
| MCD | McDonald’s | $254.48 |
| WMT | Walmart | $124.90 |
| PG | Procter & Gamble | $146.17 |
Dividend Aristocrats: McDonald’s (MCD)
Leading today’s list of Dividend Aristocrats is McDonald’s, the leading global fast-food restaurant with more than 40,000 locations in over 100 countries. Approximately 93% of the stores are independently owned and operated. The company has raised its dividend every year since paying its first dividend in 1976.
McDonald’s generates steady profits each year, even during a recession, because consumers tend to scale down their dining budgets during recessions. McDonald’s is a beneficiary of consumers trading down from more upscale restaurants to fast food when times are tough. This is a key reason why the company has been able to increase its dividend each year for more than 40 years.
During the Great Recession, McDonald’s posted excellent results, with earnings-per-share of $2.91, $3.67, $3.98, and $4.60 over the 2007 through 2010 stretch, while the dividend kept on increasing during this time.
The company has continued to generate strong earnings in 2022. In the most recent quarter, total revenue came in at $5.67 billion, a 10.6% increase compared to Q1 2021. Revenue grew 6.5% at company-owned stores, while revenue increased 13.4% at franchised restaurants. Net income equaled $1.10 billion or $1.48 per share for the quarter.
McDonald’s dividend payout ratio has been oscillating in a range of ~50% to ~60% throughout the last decade. Due to the stability of McDonald’s during past recessions, coupled with a payout ratio that is not overly high, we view McDonald’s dividend as highly secure. Shares currently yield 2.2%.
Walmart (WMT)
Next is Walmart, a recession-proof discount retailer. Walmart is the largest retailer in the world, serving more than 230 million customers each week. Annual revenue now approaches $600 billion for this industry giant.
Like McDonald’s, it could be argued that Walmart actually benefits from economic downturn. When a recession hits, consumers typically bargain-hunt, and everyday low prices are Walmart’s core strategy. Walmart managed to increase earnings steadily during and after the Great Recession of 2007-2010. As a result, this member of the Dividend Aristocrats has raised its dividend for nearly 50 years in a row.
Inflation is taking a bite out of Walmart’s margins to begin 2022. In the most recent quarter, adjusted earnings-per-share came to $1.30, which were 18 cents below analyst estimates. However, revenue grew 2.4% for the quarter to $141.6 billion, which was $3.55 billion better than expected. Comparable sales were up 3% year-over-year in the U.S., and up 9% on a two-year stacked basis. E-commerce growth was 1% year-over-year, but up 38% on a two-year stacked basis. Sam’s Club comparable sales rose 10.2% year-over-year.
Walmart should be able to sufficiently protect its margins even in an inflationary environment. One of its biggest competitive advantages is its massive size provides it with leverage over suppliers. It is likely that Walmart will be able to pressure its suppliers to lower prices.
Over the long-term, Walmart should continue to grow its earnings at a mid-single-digit pace over full economic cycles. In addition to revenue growth, earnings will be boosted by stock buybacks as well. Its e-commerce business should be the primary driver of top-line growth.
Walmart stock currently yields 1.8%. The company’s payout ratio is quite low at 35% of earnings, making for a conservative dividend policy. The dividend should be very safe, even if earnings decline, and should still be raised each year.
Dividend Aristocrats: Procter & Gamble (PG)
Finally, Procter & Gamble is a longtime member of the Dividend Arisocrats club. This company manufactures consumer staples products such as toothpaste, diapers, personal care and home care. Procter & Gamble is a consumer products giant that sells its products in over 180 countries. Some of its notable brands include Pampers, Luvs, Tide, Gain, Bounty, Charmin, Puffs, Gillette, Head & Shoulders, Old Spice, Dawn, Febreze, Swiffer, Crest, Oral-B, Scope, Olay and many more. In all, the company generated $76 billion in sales in fiscal 2021.
P&G’s dividend history is extremely long. The company has paid a dividend for more than 130 years, and has grown its dividend for 66 consecutive years. During the Great Recession, the company posted earnings-per-share of $3.04, $3.64, $3.58, $3.53, and $3.93 in the 2007 through 2011 stretch, while the dividend kept on rising during these years.
Due to its industry-leading brands, the company can pass along higher costs to consumers by raising prices. This is how the company can protect its earnings, to continue to grow the dividend each year. For example, last quarter P&G generated organic sales growth of 10% year-over-year. Half of its growth was due to price hikes, with the remainder a result of higher volumes and more favorable product mix. Adjusted earnings-per-share grew 6% for the quarter.
It is highly impressive that P&G can grow its earnings-per-share in the current inflationary environment. Along with its financial results, the company raised its fiscal 2022 guidance for a second quarter in a row, anticipating 4% to 5% sales growth (from 3%-4%). It expects earnings-per-share growth at the low end of its 3% to 6% guidance.
Still, growing earnings will allow P&G to continue raising its dividend. Procter & Gamble’s dividend payout ratio has oscillated between 50% and 75% in the last decade, with the expected payout ratio for this fiscal year at around 60%. The company should be able to keep growing its dividend at a rate roughly in line with earnings-per-share growth going forward. P&G stock yields 2.5%.
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.