These 5 High-Quality Dividend Growth Stocks Are Nearly Recession-Proof

Is a recession coming? Hard to say. I think you could argue it either way.

But why not err on the side of caution, defend your portfolio, and invest in a way where you’ll be fine – no matter what? If a recession doesn’t come, you’ll make plenty of money.

And if a recession does come, you’ve positioned your portfolio and the dividend income it produces to hold up in the storm.

Jamie Dimon, CEO of JPMorgan Chase, believes an economic hurricane is on the horizon.

Well, I lived in Florida for a quite a while. And if a hurricane looked like it was closing in, we prepared – even if we didn’t necessarily believe a direct hit was likely.

Because what’s the worst that can happen if you found yourself overly prepared? Nothing, really.

On the other hand, potentially dire consequences were possible if you didn’t prepare at all… and then the storm hits you.

Now might be a good time to consider positioning your portfolio in a way that won’t leave you with a disaster, just in case. One way to do that?

Invest in companies with business models so strong, selling products and/or services so essential to everyday life, even full-on recessions haven’t taken them down.

Through multiple recessions, these companies kept on selling plenty of what they offer. And, most importantly, their dividends kept on flowing and growing.

Today, I want to tell you about five high-quality dividend growth stocks that are nearly recession-proof. Ready? Let’s dig in.

The first high-quality dividend growth stock I want to highlight today is American States Water (AWR).

American States Water is an American water and electricity utility company.

What’s more essential to life than water? Oxygen maybe? We literally can’t survive without water. So recession or not, you’re going to do whatever is necessary to keep up your reliable access to water. It’s really a no-brainer concept here. Well, American States Water provides water service to hundreds of thousands of customer connections throughout California.

By the way, California has the largest state economy in the US. If California were a sovereign nation, it would rank as the world’s fifth largest economy. So I don’t think there’s much speculation involved in betting on California customers to continue demanding access to water. It’s as close to a guarantee as it gets. And that’s why this company’s dividend is as close to a guarantee as it gets.

American States Water has increased its dividend for 67 consecutive years.

What makes this track record so uniquely impressive is the fact that it’s the longest streak for consecutive years of dividend increases out there. No company has grown their dividend for more consecutive years in a row than this company. Like I said, this dividend is as close to a guarantee as it gets. The 10-year DGR is 9.8%. And I think that’s actually pretty incredible when you think about how 10 years ago was 57 years into dividend growth for the company.

You might think they’d be running on fumes by now. But they’re just not. The stock’s yield of 1.8% might be the one disappointment here, but the yield is partially low because demand for the stock is high. And why wouldn’t demand be high, especially in this environment? With a payout ratio of 60.6%, this dividend remains as reliable as the company’s water connections.

It’s hard to think of anything more recession-proof than water.

Nobody who worries about a recession coming thinks about cutting the water. That just doesn’t happen. And this is why American States Water has kept its dividend flowing like water for decades – a period which includes plenty of recessions. Most basic valuation metrics are in line with, or slightly below, their respective recent historical averages, indicating a stock that’s roughly fairly valued here. That includes the P/E ratio of 33.6, which is actually lower than its own five-year average of 35.1. This is the kind of stock that can be one of the crown jewels of a portfolio. If you think a recession is coming, this is a very defensive idea.

The second high-quality dividend growth stock I want to highlight today is Johnson & Johnson (JNJ).

Johnson & Johnson is a global healthcare conglomerate.

Here we go again. The word that will keep coming up today is “essential”. This is all about investing in products and/or services that are essential to our everyday lives. This is the stuff that, figuratively speaking, keeps the world turning. Johnson & Johnson touches almost every possible aspect of healthcare, from pharmaceuticals to medical devices to consumer products. Think about it. If you need medicine, surgery, or even just soap, a recession doesn’t change any of that. The relentless demand for their products has created a relentless dividend.

Johnson & Johnson has increased its dividend for 60 consecutive years.

A vaunted Dividend Aristocrat. How did they get here? Easy. By selling essential products. The 10-year DGR is 6.4%, which easily beats inflation in almost any environment other than the one we’re currently in. And the stock yields a respectable 2.6%, which easily beats the market.

Plus, with a payout ratio of 44.1%, based on midpoint adjusted EPS guidance for this fiscal year, the dividend is very safe. Further bolstering the dividend’s safety is the fact that Johnson & Johnson is one of only two companies in the world with a AAA credit rating from Standard & Poor’s. That’s a higher credit rating than that of the US government – you know, a government that can print money.

Think a hurricane is coming? Well, this company is akin to hurricane shutters.

Far be it from me to disagree with Jamie Dimon, but I would say that I’m not quite so pessimistic. Regardless, if it’s even in the realm of possibility that a hurricane is on its way, why not batten down the hatches? This company is as close to bulletproof as it gets, recession or not. And it’s the kind of business that can be the foundation of a very high-quality and durable portfolio. I actually listed Johnson & Johnson as one of my top five stocks for 2022.

It’s only up 3% this year, but it’s also a year in which the S&P 500 is down 14%. Relatively speaking, it’s held up very well – which speaks on the very nature of this video. This is the kind of stock that investors run to when trouble is brewing. And rightfully so, in my view. With a forward P/E ratio of 17.2, based on the aforementioned midpoint adjusted EPS guidance, it remains surprisingly cheap for how much safety it offers in this environment. It might be boring, but don’t sleep on Johnson & Johnson.

The third high-quality dividend growth stock I want to highlight today is NextEra Energy (NEE).

NextEra is an energy company that operates the largest electric utility business in the United States.

Once again, we have the essential. This time, we’re talking about electricity. Look, we have to face the facts. We basically can’t function in our modern-day society without access to reliable electricity. And so even in a recession, nobody is going to voluntarily cut off their electricity. It’s hard enough to get people to even cut back on it.

Well, NextEra obviously benefits from this – they’re the largest electric utility business in the USA. And what makes NextEra unique among large US utilities is their aggressive investments in renewables – it’s the world’s largest producer of wind and solar energy. This makes the company’s name quite appropriate, as the company is positioning itself for the next era in energy. And that positions the company’s dividend very well for the era ahead.

NextEra has increased its dividend for 28 consecutive years.

Another Dividend Aristocrat here. If the next era is anything like the last era, this company is poised to do extremely well. The 10-year DGR is 10.8%. That’s another thing unique about this business. It’s a rare utility business that’s actually growing its dividend at a double-digit rate. On the other hand, the stock’s yield isn’t as high as what you often get with other utilities. It’s only 2.2%.

Still, I like that kind of combination of yield and growth, which is better than what a lot of other utilities offer. That growth is, of course, powered by their unique combination of a strong regulated utility business and the scaled-up renewables. With a payout ratio of 56.7%, based on midpoint guidance for this fiscal year’s adjusted EPS, this Dividend Aristocrat should continue to power an ever-higher dividend.

Recession or not, electricity demand is going nowhere but up.

Why do I say that? Well, just think about our lives. We’ve never been more dependent on electricity. From streaming TV to being glued to your smartphone, we need electricity more than ever. And our population is only growing, which means more people consuming more electricity. NextEra is, arguably, the best electric utility business in the US. They own and operate Florida Power & Light, which is the largest energy company in the US as measured by retail electricity produced and sold.

FPL serves millions of customers in the fast-growing and very popular state of Florida. Simultaneously, NextEra is a massive player in renewables. This one-two combination is why they’re running circles around most other US-based electric utility businesses. Based on that aforementioned adjusted EPS guidance, the forward P/E ratio is 26.3. Cheap? No. But not egregious for a well-positioned electric utility that stands to do well – recession or not.

The fourth high-quality dividend growth stock I want to highlight today is PepsiCo (PEP).

PepsiCo is a multinational food, snack, and beverage corporation.

Want more of the essential? Okay. I got ya covered. PepsiCo sells food, beverages, and snacks. People don’t stop eating in recessions. While people can certainly trade down in recessions, where they go after lower-priced products, PepsiCo is already there. This isn’t caviar we’re talking about here. No, PepsiCo, with its various beverages and snacks, is definitively on the value side of things when it comes to foodstuffs. This is undoubtedly part of the reason why PepsiCo has such a phenomenal track record for growing the dividend through thick and thin.

PepsiCo has increased its dividend for 50 consecutive years.

Yep. Another Dividend Aristocrat here. If you think a hurricane is coming, Dividend Aristocrats make a lot of sense. They’ve proven their resiliency over the course of decades. It’s shelter in a storm. The company’s 10-year DGR is 7.7%. Again, in almost any environment other than this one, that easily beats the inflation rate. And with a 2.8% yield, the stock also offers a compelling amount of current income that you can rely on to get the bills paid. The payout ratio, at 62.9%, is a bit elevated, but not at all abnormal for the company.

This company has conquered numerous recessions over its more than 100 years of operation. I think it’ll conquer many more.

PepsiCo has been around since the late 1800s. It’s still here in the early 2000s. And I’m confident it’ll be around in the 2100s. The company has built more than 20 different billion-dollar brands. That doesn’t happen by accident. These are food and beverage products that don’t base their appeal upon economic cycles. And that’s why the business is nearly recession-proof, which, of course, translates to the dividend being nearly recession-proof.

Every basic valuation metric I look at is close to its respective recent historical average. The P/CF ratio, for instance, is at 18.8. That’s a hair away from its five-year average of 18.7. In my opinion, a portfolio would be more durable and better able to withstand a recession with PepsiCo in it. With the stock looking fairly priced here, any dividend growth investor who’s concerned about an impending recession should be taking a look at this name.

The fifth high-quality dividend growth stock I want to highlight today is Procter & Gamble (PG).

Procter & Gamble is a multinational consumer goods corporation.

Procter & Gamble is no gamble. This company sells the basic products that billions of people all over the world demand and use every single day. Think toothpaste, razors, shampoo, laundry detergent, and tissue paper. Unless the next recession puts us back in the stone age, there’s no economic cycle that would somehow relegate society to no longer needing and using these essential products. I personally use a number of Procter & Gamble’s products every day. And so do billions of other people. You almost can’t not use their products. They’re practically unavoidable. And that makes the company’s dividend – and the growth of it – almost unavoidable.

Procter & Gamble has increased its dividend for 66 consecutive years.

This Dividend Aristocrat has a track record for dividend growth nearly as long as American States Water. Only one consecutive year of dividend growth separates the two companies. Procter & Gamble’s products are so essential, they rank not far behind water itself. If water is the benchmark by which everything else is measured, that’s pretty incredible. The 10-year DGR of 5.2% isn’t bad at all, and recent dividend increases have shown some much-desired acceleration in this department. Also, the stock’s yield of 2.5% easily beats the market. The payout ratio of 63.9%, which is fairly customary for the business, indicates a dividend that’s just as reliable as it’s ever been.

There are no guarantees in life. Certainly no guarantees in investing. But I can’t imagine any recession putting this business in danger.

Procter & Gamble won’t make you rich overnight. Actually, none of the businesses I’m highlighting today will do that. Instead, these are steady-eddy business models that have proven their mettle through multiple recessions over the course of decades, and I think all of that will continue to be the case going forward. I mean, Procter & Gamble was founded in 1837. It’s not going anywhere.

Like PepsiCo, Procter & Gamble has more than 20 different billion-dollar brands. That only happens when you’re providing what a lot of people want. Now, the valuation does look a bit rich. The P/E ratio is 25.5. That’s up there. And the P/CF ratio of 21.7 is measurably higher than its own five-year average of 18.6. But a pullback in this name could be the perfect opportunity to own a slice of a business that’s about as recession-proof as you’ll ever see.

— Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.