Matt DiLallo, The Motley Fool
6 min read
There are lots of warning signs flashing in the stock market these days. That’s causing me to shift my portfolio to a more defensive posture. I sold off several lower-conviction holdings. I’m redeploying some of the proceeds into high-quality dividend stocks.
I just invested over $4,600 across Abbott (NYSE:ABT), Procter & Gamble (NYSE:PG), and Paychex (NASDAQ:PAYX). Here’s why I’m loading up on these top dividend stocks right now.
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Why I’m getting defensive and investing in dividend growers
While the stock market has continued to move higher this year (the S&P 500 is up more than 13% year-to-date), there are some signs that we could be approaching a near-term top. The CAPE ratio is at its second-highest level in history, while margin debt is soaring. Meanwhile, inflation remains high, which recently led the Fed to hike rates for the first time in three years. All these signs seem to point to potential for more volatility ahead.
That’s leading me to shift my portfolio to a more defensive posture by adding more ballast. One of the best sources of portfolio stability without giving up long-term return potential is companies that routinely increase their dividends. According to data from Ned Davis Research and Hartford Funds, dividend growers have delivered an average annual total return of 10.2% over the last 50 years. That compares to a 4.2% annual return for dividend non-payers. Meanwhile, dividend growers have an average beta of 0.89, while dividend non-payers have an average beta of 1.18. A beta below 1.0 means a stock is less volatile than the S&P 500, while a beta above that level implies higher volatility.
A healthcare dividend stalwart
Abbott has been a stellar dividend growth stock over the years. The healthcare giant has increased its payment for 54 consecutive years, qualifying it as a Dividend King, a company with 50 or more consecutive years of annual dividend increases. Abbott hasn’t just been nudging up its payment to keep its streak alive. It hiked its payout by 6.8% last year and has grown its dividend by 70% since 2020.
The diagnostics, medical devices, nutritionals, and branded-generic medicines company generates highly resilient cash flows to support its 2.4% dividend yield (more than double the S&P 500’s current level of around 1%). Abbott has historically grown its earnings per share at a nearly 10% compound annual rate over the last decade, driven by organic growth and value-enhancing acquisitions. Even if Abbott grows more slowly over the next decade, it could still double an investor’s money given its currently attractive valuation. The company’s durable cash flows and growing dividend are just what I’m seeking these days, which is why I just bought $1,000 of Abbott stock.
