Today, I have two safe dividend stocks to recommend to you for a possible market pullback now that it’s climbed all the way back to all-time highs. Because in the short term at least, it’s crucial to have some safety in your portfolio…
We don’t know what is going to happen. This year is a perfect example of that fact. Who knew that the year 2020 would thrust the country and the world into the throes of a pandemic that would force us into our bunkers and crash the economy? Didn’t see that coming?
And the market just loves it. Sure, there was a violent selloff in the early days. But stocks have come all the way back. In fact, the S&P 500 just made a new all-time high. The index is reflecting a market that seems to think things are better now than before the pandemic ever happened.
How can that be?
The market isn’t stupid. And it usually gets things right. The market is forward looking. It looks six to nine months into the future. In that span, it sees a rapidly recovering economy drowning in Fed stimulus and record-low interest rates, with money having no place else to go but stocks to fetch a decent return.
The market is looking past the virus to a very positive environment for stocks. While the economy will not be back to pre-pandemic shape for a much longer time, things will be going in the right direction. Besides, we got the long overdue bear market and recession over with and now the Fed is friendly.
I hope that turns out to be right. And I believe in the U.S. economy. It almost always proves stronger and more resilient than the negative media reflects. It is also true that the market indexes have been driven higher by the amazing performance of technology stocks, as business has largely been even better for the sector during the pandemic. But many stocks and sectors are still beaten down and are more reflective of the current realities on the ground.
I also believe that we are in a longer-term secular bull market. In the grand scheme of things, this pandemic will fade and stocks will continue to perform strongly. But the near term is looking awfully dicey. There’s an awful lot of risk out there for a market at all-time highs.
Who knows what the virus will do? There could be a second wave that is worse than the first. The market seems confident that a vaccine will be coming in the quarters ahead. But that could prove to be wishful thinking. Then there’s the presidential election. Elections always inject unwanted uncertainty into the equation, but this time it’s worse. There is a risk of an uncertain or contested outcome in November that could wreak havoc on the markets.
I’m by no means a gloom-and-doomer. I just think that under the current circumstance it is prudent to eye some relatively safe dividend stocks with businesses that will continue to thrive regardless of the course of this virus or who’s elected President. Here are two to consider.
Safe Dividend Stock #1: Altria (MO)
Altria Group (MO) is the largest U.S. domestic cigarette maker and one of the largest in the world. The company is the domestic part of the old Philip Morris that spun off the international division in the form of Philip Morris International (PM) in 2008. Altria now operates primarily in the United States.
Cigarette sales have been in a long-term decline of about 4% per year. That rate increased in recent years with the popularity of E-cigarettes. In order to offset the additional slippage, Atria purchase a 35% stake in the dominant E-cigarette player JUUL for $12 billion in late 2018. It also purchased marijuana company Cronos (CRON) for just a few billion.
JUUL has since turned out to be the acquisition from Hell. It has been under relentless attack by regulators over its marketing practices to young people. Altria has already written off two-thirds of the investment. Cronos has been floundering as well.
Because of lower cigarette volumes and Atria’s failed attempt to combat it, the stock is 44% below the all-time high. It is priced as if those acquisitions are worthless. But they aren’t. In addition, there are other growth avenues such as a recently approved joint venture with Philip Morris International to market a heated tobacco product nationally.
The stock pays a massive 7.9% yield that is safe. The company still makes money and grows earnings. In the last pandemic-riddled quarter the dividend accounted for 77% of free cash flow. The historic average is 80% and the company has grown the dividend for more than 50 years at that level.
It’s a great value stock. MO is beaten to a pulp and the massive yield is rock solid. I don’t know when the price will come alive but you get paid about 8% in the meantime.
Safe Dividend Stock #2: AbbVie Inc. (ABBV)
AbbVie is a cutting-edge company specializing in small molecule drugs. It has grown into the eighth-largest pharmaceutical company in the world, primarily on the strength of its blockbuster biologic autoimmune drug Humira, the world’s number one drug by far with annual sales of about $19 billion.
Although ABBV has performed well of late, having recently run close to the 52-week high with a 50% return over the last year, it is still cheap. The stock is still more than 30% below the 2018 high and selling at less than 10 times forward earnings.
It’s cheap because the blockbuster Humira drug is facing increasing competition and the market has worried that the company won’t be able to replace the lost revenues. I believe fears are overblown and the market is starting to agree. The drug is only facing competition overseas and has patent protection in the U.S., which accounts for three-quarters of revenues, until 2023.
The company has one of the very best pipelines of new drugs in development in the industry as well as hugely promising, newly launched drugs. The company believes recently launched cancer drugs Imbruvica and Venclexta can generate $9 billion in annual sales by 2025. It also launched two drugs last year that were rated among the top three launched of the year by EvaluatePharma that AbbVie thinks could bring in $10 billion a year by 2025.
To further diversify away from dependence on Humira, AbbVie purchased Ireland-based Allergan (AGN) for $63 billion last year. The company is about half the size of AbbVie and features blockbuster facial treatment drug Botox. The acquisition will diversify the company away from Humira in the near term while the stellar pipeline gains traction.
This is a defensive company that offers value and high yield with a very recession resistant business. But it also offers solid growth in the near term and the enormous tailwind of an aging population longer term.
By the way, the stock also yields a stellar 4.7% while you wait for the price to go higher.