If you’re worried about the economy slowing down, you should buy these two dividend stocks.
The best dividend stocks to buy now are those that can weather a recession, high inflation, and rising interest rates. In 2023, the world economy is expected to slow down a bit, which will hurt corporate profits, free cash flows, and stock-based compensation plans.
For the years beyond 2023, which dividend stocks should investors hold onto? Two recession-proof dividend stocks that should provide stable returns on capital during this volatile period in the market are ConocoPhillips (COP -2.95%) and Merck (MRK -1.09%). Take a look below to learn why these stocks are some of the best in terms of dividends.
ConocoPhillips (COP)
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First and foremost, there is ConocoPhillips. For a number of reasons, the stock of oil and gas behemoth ConocoPhillips represents an extremely secure passive income vehicle. First, the firm has outlined a 10-year strategy that prioritises prudent capital allocation, rising financial results, and substantial returns for shareholders (dividends and share buybacks).
If the price of crude drops to $40 per barrel in the future, ConocoPhillips should still be able to pay its current dividend. The 12-month trailing dividend payout ratio for the company is currently 24.6%, which is extremely low for a stock in the large-cap oil and gas sector. With a dividend yield of 3.95 percent per year on average, this payout ratio is especially impressive.
Second, the price of ConocoPhillips’ stock is relatively low. The stock is trading at about two times estimated sales for 2024, despite having increased by 24.5% over the prior 12 months. To give some perspective on this valuation metric, the oil and gas industry’s average price-to-sales ratio is 3.1.
Last but not least, the oil and gas giant has an impeccable financial record. ConocoPhillips has a relatively low debt-to-equity ratio of 34.6, despite its substantial investments in an emissions reduction program. That being said, this top dividend stock is free of any debt overhang that could be a concern for investors. In contrast, many of the company’s closest competitors in the oil and gas industry would not be able to make such a claim.
Merck (MRK)
Big Pharma giant Merck In light of the current economic climate, Merck is an excellent way to generate passive income. Although growth in the COVID-19 franchise has slowed, analysts predict that Merck will still increase annual sales by nearly 6% in 2019. Sales of declining franchises like COVID-19 should be more than offset by the pharmaceutical giant’s best-selling cancer therapy, Keytruda, and its human papillomavirus vaccine, Gardasil.
In addition, the current dividend yield of 2.69% makes Merck a stock with a slightly above-average dividend (among large-cap stocks). A relatively low trailing 12-month payout ratio of 49% demonstrates that the pharmaceutical company’s dividend programme is well supported by its substantial free cash flows. With a strong clinical pipeline, Merck should be able to sustain annual dividend growth at reasonable rates in the long run.
Wall Street forecasts that the company’s R&D will pay off with multiple blockbuster products in cancer and cardiovascular disease within the next few years, despite the fact that its late- and early-stage pipelines do carry a fair amount of risk. In turn, Merck should continue to provide reliable returns on capital and consistent quarterly dividend payments to its shareholders.