3 Dividend Stocks That Thrive in Both Bull and Bear Markets

Markets Motley Fool

Many investors prefer dividend stocks because they offer a nice balance of capital appreciation and income. The best dividend payers, though, also boast a long history of increasing their payouts, regardless of what the broader market is doing. 

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Below, Motley Fool investors highlight three businesses -- McCormick (NYSE: MKC), Procter & Gamble (NYSE: PG), and Costco (NASDAQ: COST) -- that have demonstrated the ability to reward shareholders through economic booms and busts.

Spicy income

Demitri Kalogeropoulos (McCormick): You'd have to squint to find evidence of the most recent bear market's impact on McCormick's operating results. Sure, sales were flat during the worst period of the Great Recession in 2009. But the spice and flavorings giant logged higher gross and operating profit at the time, saw its earnings jump 17%, and boosted annual operating cash flow by over $100 million to a record $416 million. McCormick's finances were so strong that the company raised its dividend by 9% that year and by 8% the following year.

The business has only gotten stronger since then. In fact, profitability hit a record high in 2016 thanks to a healthy mix of rising prices and falling costs, plus the positive contribution of acquisitions like the Gourmet Garden brand.

McCormick's leadership position in the global flavorings industry gives management good visibility into the company's growth potential. In late June, executives confirmed their initial 2017 outlook and still see revenue growing by between 5% and 7% as adjusted earnings rise by between 9% and 11%. That steady sales pace points to continued market share gains while the profit boost suggests another hefty payout raise for this Dividend Aristocrat in 2018.

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A defensive retailer

Jeremy Bowman (Costco Wholesale): Most retailers tend to be cyclical stocks as consumer spending drives much of the economy, but some offer investors protection in bad times as well as good. Costco Wholesale is one such retailer as its unique model makes it strong in both bull and bear markets. With memberships starting at $60 a year, the company tends to attract higher-income customers and its stores are located primarily on the coasts, which fared better than much of the country in the most recent recession.

Costco also sells a mix of both necessities like groceries, but also "treasure hunt" items like sheepskin rugs that you may not see there next time. That model helps encourage consumers to spend more money once they enter the store. 

As a dividend payer, Costco only offers a yield of 1.3%, but that percentage is actually much higher if you include the special dividends the company has offered in recent years. Costco paid investors a $7 special dividend in 2012, a $5 one in 2015, and offered another $7 special payout this year. Factoring those in and assuming they continue at the same rate, the actual yield is more like 3.6%.

Costco shares are off 15% from their high earlier this year, after plunging on news of the Amazon.com-Whole Foods tie-up, but its performance remains strong as comparable sales globally were up 5.3% in July, excluding fuel prices and currency exchange. 

With the recent pullback and the strong comparable sales, now may be an excellent time to get a piece of Costco stock.

The investment staple for any market

Travis Hoium (Proctor & Gamble): There aren't a lot of products that never go out of style but things like toilet paper and laundry detergent are awfully high on the list. Proctor & Gamble has built a giant business on the back of these kinds of consumer goods, and that makes the company thrive in both bull and bear markets. In fact, it may be more ready for the bear market cycle than it is for bull markets when investors go looking for growth. 

You can see in the chart below that P&G isn't a growth business at all and revenue has declined since 2014 as it has spun off assets. But it has remained highly profitable every year, even in the recession. 

That profitability is what drives a dividend that currently yields 3% for investors and has increased every year for the last 61 years. If you're looking for a stock that can perform well through thick and thin, this is it. And unless people stop washing themselves or their clothes, Proctor & Gamble will be a moneymaker in any market.

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Demitrios Kalogeropoulos owns shares of Costco Wholesale. Jeremy Bowman has no position in any of the stocks mentioned. Travis Hoium owns shares of Procter & Gamble. The Motley Fool recommends Costco Wholesale and McCormick. The Motley Fool has a disclosure policy.