BEST Dividend Stocks to Beat the 2024 Recession | Stock Market Crash Explained

All eyes are on Jerome Powell and people want to know what types of stocks we should look at as interest rates appear to be nearing the summit. 

I’m going to make the case for dividends and my top 3 recession-proof stocks might surprise you. 

On the go? Watch my video here:

Let’s get into it.

So far, the tech giants have been propping up the market in 2023. In fact, the majority of the S&P 500 gains this year have come from just 7 big tech companies, with little to no dividends. 

On top of that, these 7 companies make up more than 28% of the S&P 500. In other words, the market is overly concentrated on tech and growth companies. 

Why do you think that is? First, let’s take a look at interest rates. 

Interest rates have risen faster now than they have in the past 35 years. This graphic really illustrates the relative difference between past rate hikes and now. 

Just look at how much more extreme the slope is as well as the magnitude. We are also sitting at the highest federal funds rate that we have seen in 22 years.

Now keep in mind that interest rates going up and down is nothing new. It is well-documented that our economy tends to follow a boom-bust cycle, so there are some interesting patterns that we can take advantage of. 

The only difference now is the speed at which the rates have increased, which does change things slightly, so keep that in mind. 

More on that later.

Do you know what kind of companies do well during an economic boom? You probably guessed it. Growth companies. 

A rising tide raises all ships. 

This graph shows the historical federal funds rate and the shaded regions represent US economic recessions. Do you see the pattern? It holds true even as we go all the way back to 1957. 

1960 same deal as 1957. Rates go up to a peak, then as rates fall back down we have an economic recession. Again in 1970, 1975, early 1980s it happens, 1990 it happens, 2000, and 2007. 

We can even see a sliver of recession during COVID-19 that also corresponds with a rate hike and a subsequent rate fall.

Now here we are at the end of 2023 and Jerome Powell has just paused the rate hike again, and we are sitting between 5.25% and 5.5%. The climb is starting to slow, which indicates we could be at the summit. 

That is an important data point as we consider which stocks are most likely to perform well going forward. 

So if I want to hone in on companies that are going to do well in recession I like to look at two different categories.

Sectors Affected by Recession

Defensive VS Cyclical

First, which sectors are most likely to do well?

Here’s a breakdown of the primary sectors that make up the US economy and whether they are classified as cyclical or defensive. 

• Cyclical means that a sector will go up when the economy does well and will go down when the economy goes down. In other words, the sector is strongly correlated with the economy.

• Defensive sectors, on the other hand, have a weaker correlation with the economy. That doesn’t mean that they will necessarily go up when the economy goes down, but they are more insulated.

When we look at the 7 big tech companies and their respective sectors, we can see that they are all cyclical. 

• Apple, Microsoft, and NVIDIA are all in the info technology sector. 

• Google and Meta are in the communication services sector. 

• Amazon and Tesla are in the consumer discretionary sectors.

The defensive sectors include health care, energy, utilities, and consumer staples. They are all considered defensive because people will need to spend money in these categories, whether the economy is in recession or not. 

Additionally, the defensive sector companies also tend to have a dividend, which leads me into my second category: value versus growth companies.

Value VS Growth

A growth company is one that the market believes will grow. In other words, the price of the stock is very high compared to the current profitability. 

Typically, growth companies will not pay a dividend to shareholders because the company is reinvesting all of its profits back into the company for growth. 

A value company is just the opposite. The market does not believe a value company will grow necessarily, so its price stays lower. The price of the stock is very low compared to the current high profitability. 

Value companies generally do pay a dividend, especially if the company is not trying to grow very fast.

So the big tech growth companies that are cyclical in nature will not perform well when the economy begins to contract. Therefore, I’m going to lean my portfolio more toward value stocks with strong dividends that are defensive in nature. 

Picking Recession-Proof Dividend Stocks

I’m looking for companies that have a solid history of maintaining their dividend even through past stock market crashes. 

1. Bristol-Myers Squibb (BMY)

The first dividend stock is in the healthcare sector and is therefore considered to be a defensive company. It will be well-insulated from a market downturn because healthcare needs are largely independent of the economy.

It also has a huge dividend yield at the moment, 4.46%, which is nearly three times the dividend yield of the S&P 500, which is currently sitting at 1.51%. 

Keep in mind though, having a high dividend yield is one thing, but the company has to be rock solid. 

That dividend is not gonna do you any good if the company just poops the bed when the economy slows down, especially when an economic decline is your prediction and you’re trying to be defensive. You can’t just look for high dividend yields. You have to drill down and evaluate the company.

The first metric I want to see is how many years has this company consistently grown its dividend. 

My favorite resource to use for this is Seeking Alpha. Let’s check out the Dividend tab and click on the Dividend History subtab. When we set the duration to the max, showing us the dividends paid since 1989, it has never missed or reduced the dividend. Every year, the dividend either stays the same or grows for 34 years. 

The dot come bubble pops in 2000, you get a dividend. In the 2008 financial crisis, you still get a dividend. COVID-19, you still get a dividend.

I also like to look at the historical dividend yield. If the dividend yield is higher now than normal, then the company could be trading at a relative discount. And sure enough, the dividend yield is at an all-time high.

We can also check out the valuation tab and see that Seeking Alpha scores this company very well. The PE ratio is less than half of the sector median. It is definitely a value stock.

Seeking Alpha will also give a dividend scorecard, which is nice to quickly evaluate the dividend as well. It scores very well in all of these metrics: dividend safety, growth, yield, and consistency.

The final thing I like to check is the company’s financials. I want to see that they are growing their revenue and profit. Dividends are not the end-all-be-all. We still want to see capital gains. Total revenues and gross profits have consistently increased over the last 10 years.

Bristol Myers Squibb is a worldwide biopharmaceutical company. Bristol Myers Squibb has a solid high-yield dividend with growing revenue. It seems to be trading at a solid discount. 

I will be adding Bristol Myers Squibb, ticker BMY, to my portfolio.

2. Clorox (CLX)

The second dividend stock that I’m adding to my portfolio manufactures and markets consumer and professional products worldwide. 

It has a ridiculously safe dividend yield of 3.9%. 

It has paid a dividend every year for 46 years and raised its dividend every year for 46 consecutive years. 

On top of that, the dividend is at a 10-year high, meaning that you are getting a relatively good deal. The PE ratio is not lower than the sector median but I am willing to live with that since the yield is so high relative to the past.

Finally, we can see that it has consistently increased both revenue and profit over the last 10 years.

Seeking Alpha gives the company an A growth score as well so I will be looking to see the stock price go up in the future along with the dividend.

I imagine most people have heard of the Clorox company. The Clorox company has a rock-solid dividend with growing revenue. It seems to be trading at a solid discount. 

I will be adding the Clorox company, ticker CLX, to my portfolio.

3. Real Estate Investment Trust (O)

The last dividend stock I want to look at is not a defensive sector company. It’s actually cyclical. 

Real estate is somewhat correlated with the economy, but rental income tends to increase every year independent of the stock market. 

The dividend ratio is already insane at 6.14% and is currently very close to a 10-year high.

It also has a very consistent dividend so anytime I see it above 5%, I consider increasing my position. Look at the dividend history: 25 years of dividend payments and 25 consecutive years of dividend growth. 

If we also look at the financials, it has grown in revenue every year for the past 10 years. Especially since 2019, they have more than doubled their revenue. 

Realty Income Corp is actually a REIT, which stands for Real Estate Investment Trust. It has a solid high-yield dividend with growing revenue. It seems to be trading at a solid discount. 

I will be adding Realty Income Corporation, with stock ticker O, to my portfolio.

Having a diversified portfolio is very effective at mitigating losses from a stock market crash. A large portion of my portfolio is in ETFs, so I can be sure that I’m not too overly exposed to any one sector or company.

That being said, I will lean my portfolio one way or the other, depending on market conditions, which is what I’m trying to do now. 

There is a real chance that we will be seeing an economic recession in the coming months. 

If you want to learn more about the different indicators and clues hinting towards a market crash, check out this video where I explain what you should do in each situation to come out on top. That way you won’t wake up in the middle of the night screaming, Jerome Powell.

Until next time.