6 Dividend Stocks That Will Maintain Their Payouts in an Economic Downturn

• These dividend stocks will very likely keep their payouts at the same or higher levels, given their history and cash flows.
• AT&T (T): The company clearly has the ability to fund its $1.11 dividend payout now that it has spun off Warner Bros Discovery (WBD). The stock yields 5.7%.
• Exxon Mobil (XOM): This company refused to cut its dividend during the Covid crisis.
• Clorox (CLX): People will still use cleaning products during a recession. The company has a robust history of increasing its dividend over the last 20 years.
• The Proctor and Gamble Co. (PG): This company has had 66 years of annual consecutive dividend increases, including a recent increase to 91.33 cents.
• Hormel Foods (HRL): This company has consistently raised its dividend over the last 50 years. In the last 20 years, its average annual dividend increase has been 13%.
• Kroger (KR): Kroger has been paying higher dividends over the last 17 years. People will still go to retail stores, even during a recession.

It’s important to know that investing in dividend stocks is about consistency and the ability to pay even in the direst of economic circumstances. After all, this is the chief advantage that dividend stocks have over bonds. Bond coupons are not raised. If inflation rises, they cannot adapt, as dividends can. This is why it is almost always better to stick with dividend-paying stocks with a long history of increases.

Here is a simple example of how this works. The average dividend yield of each of these six stocks is about 3% (3.03%). Let’s assume that their average dividend growth is 8% each year for the next 10 years. If we compare that with a bond with a higher coupon, say 3.5%, the results are very interesting.

Over the 10 years, an investor who puts $1,000 in these dividend-paying stocks will receive a total of $438.46 in dividend payments. But the investor with $1,000 in a 4% coupon bond will receive just $400 in payments over that 10-year period. That means that even though the initial yield of 3.03% from dividend stocks is lower than the 4.0% coupon bond, the stock investors collect more income over the next 10 years from dividend growth.

This can be seen in the chart on the right, which shows that by year eight, the cumulative dividend payments have overtaken the cumulative bond payments.

One way to ensure this is to look at the company’s payout ratio. This compares the cost of dividends to the earnings of the company. As long as the dividend per share stays below the earnings per share level, you can be reasonably assured the company’s board won’t balk at raising the dividend. Another important factor is how long the company has been raising its dividend.

We will look at both of these factors in the following six dividend stocks.

AT&T (T)

Market Cap: $135 billion
Dividend Yield: 5.7%

AT&T (NYSE:T) recently spun off its WarnerMedia division to its shareholders and then immediately merged it with Discovery Inc. The new company is called Warner Bros. Discovery (NASDAQ:WBD).

In the process, AT&T lowered its $2.08 dividend per share to $1.11. At today’s price, that gives it a 5.7% dividend yield, but its payment is now more secure. That is because the company has said that this will be about 40% or so of its free cash flow (FCF). As FCF grows from the now-more-focused telecom operations of AT&T, it can increase the dividend.

In fact, AT&T says that it is in the mid-90th percentile of high-dividend-yield payers, even with this lower dividend payment. Moreover, as a result of the WBD transaction, AT&T received $43 billion, which it’s using to pay down debt.

This also makes the dividend very secure on an ongoing basis for investors.

As a result, the dividend payout ratio looks very comfortable. For example, for 2023, 21 analysts surveyed by Refinitv forecast its earnings per share (EPS) at $2.55. That means that the $1.11 dividend per share (DPS) is only 43.5% of its EPS. With this high yield and low payout ratio, T stock looks like one of the best dividend stocks.

Exxon Mobil (XOM)

Market Cap: $361 billion
Dividend Yield: 4.1%

Exxon Mobil (NYSE:XOM) pays out a dividend of $3.52 annually, giving it a 4.1% dividend yield. Moreover, analysts expect that this year its EPS will reach $9.07 this year and (assuming lower oil prices) $7.65 next year. This implies that its payout ratio is still very comfortable at 46% even on the lower 2023 forecasts.

One of the main reasons that you can expect that Exxon won’t cut its dividend is that it refused to do so during the height of the pandemic. I wrote about this in a separate InvestorPlace article a year ago, arguing that as a result, it was a good bargain. Exxon could afford to do this because it was not buying back shares at the time.

Now that its cash flow is much stronger, Exxon has reinstituted its share buyback program. It can afford to do so now that it is cutting out $9 billion in extra costs, as shown in its recent Investor Day presentation.

That helps companies to raise their dividends for the same cost to their finances. This makes their payout stronger. XOM looks like one of the better dividend stocks as a result.

Clorox (CLX)

Market Cap: $17.7 billion
Dividend Yield: 3.1%

Clorox (NYSE:CLX) produces around 360 brand names in the cleaning space. Consumers love its products, and the company was especially popular during the Covid-19 crisis. Now that the pandemic has abated, its earnings are falling this year, but are expected to rise again next year.

This year EPS should hit $4.18 per share, which is below its DPS of $4.64. However, by next year, it will be above the DPS at $5.63, according to analysts.

In the last five years, Clorox has grown its dividend by over 7.7%, and in the last 10 years, it has averaged annual growth of 6.8%, according to Seeking Alpha. This should be a comfort to investors, showing that the company intends to grow its dividend over the near and long term.

The Proctor and Gamble Co (PG)

Market Cap: $385 billion
Dividend Yield: 2.2%

The Proctor and Gamble Company (NYSE:PG) is a consumer goods company with an array of popular brands and 66 years of annual dividend increases — including a recent increase to 91.33 cents as of April 12. That puts its annual dividend at around $3.65 per share, well below analyst EPS forecasts of $5.84 this year and $6.25 next year.

Moreover, over the last 10 years, Proctor and Gamble Company has had an average compound dividend growth rate of 5.13% each year according to Seeking Alpha. That is a very consistent growth rate and implies that investors can expect that in 10 years, the dividend will be 64.9% higher than when it started.

The simple fact is that Proctor and Gamble Company has many consumer brands that people love and will continue to buy, even during a recession.

It operates in five segments: beauty; grooming; health care; fabric & home care; and baby, feminine & family care. This is what powers its strong growth and makes PG stock one of the best dividend stocks going forward.

Hormel Foods (HRL)

Market Cap: $29 billion
Dividend Yield: 1.9%

Hormel Foods Corp (NYSE:HRL) produces grocery and refrigerated products and has iconic brands such as Planters, Skippy, SPAM, Natural Choice, Hormel, Black Label, and over 30 others. The company has consistently raised its dividend for over 20 years.

For example, last year it paid out 98 cents in dividends per share. This year it is on track to pay $1.04 in DPS, or 6.1% more. Seeking Alpha calculates that Hormel has grown its dividend by 9.9% in the past five years on average.

The point is that the dividend is rising each year along with the company’s earnings.

Analysts forecast that Hormel will produce $1.93 in EPS this year and over $2.10 next year. That is well over the $1.04 per share in dividends, putting its payout ratio at 54%. This makes HRL stock one of the best dividend stocks to hold if a recession happens.

Kroger (KR)

Market Cap: $39 billion
Dividend Yield: 1.5%

Kroger (NYSE:KR) is one of the top grocery and drug store retailers in the U.S., with over 2,726 supermarkets in the U.S. Its annual 84 cents per share dividend is well below the company’s forecast EPS of $3.81 this year and $3.97 next year.

Moreover, over the past five years, Kroger has grown its DPS by 11.74% on average each year, according to Seeking Alpha. In fact, in the last four quarters, it has paid out 21 cents per quarter, which was 16.7% higher than the average of 18 cents paid per quarter prior to this.

In fact, Kroger is due to make an announcement before the end of June about its next quarterly dividend hike. This could make KR stock one of the more interesting dividend stocks — especially if its dividend rises substantially.

On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.