3 Dividend Stocks Should Thrive in a Recession

Markets Motley Fool

The market's been booming and things have been going well since the end of the Great Recession, but that doesn't mean things are going to be sunny forever. Another recession is bound to happen and surviving one without losing their shirt is every investor's goal.

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Three Motley Fool investors have identified Amgen (NASDAQ: AMGN), Johnson & Johnson (NYSE: JNJ), and Wal-Mart Stores (NYSE: WMT) as dividend stocks that not only will survive, but should thrive in the next recession.

A big biotech for bear markets

Keith Speights (Amgen): One of the best ways to find out which stocks will perform best in future downturns is to look back at previous significant market downturns. In the last bear market that began in 2008, one stock that performed quite well was Amgen. Shares of the big biotech actually increased nearly 24% in 2008.

Companies with stocks that thrive in bear markets tend to have a common denominator: They sell products that people need regardless of the economic climate. That's certainly the case for Amgen. The company's top products include autoimmune-disease drug Enbrel, and Neulasta, which helps cancer patients on chemotherapy fight off infections.

The Amgen of today isn't the same as the Amgen of the last downturn, however. On the positive side, the company now pays a nice dividend with a current yield of just under 2.5%. The negative for Amgen is that sales for both Enbrel and Neulasta are declining.

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Amgen appears to be in a good position to overcome the headwinds to its top products, though. Significant potential remains for cholesterol drug Repatha. The biotech expects great things for experimental migraine drug erenumab, with an approval decision by the U.S. Food and Drug Administration due by May 2018.

In addition, Amgen has an enormous cash stockpile of around $40 billion (including cash, cash equivalents, and marketable securities.) Amgen CEO Robert Bradway recently stated that the biotech "is trying to find acquisitions that add value for our shareholders." I look for the company to make good on Bradway's goal in 2018, if not sooner. A smart acquisition or two by Amgen should help keep this big biotech a good choice for investors in bull or bear markets.

When you need medical help, the economy is the least of your concerns

Brian Stoffel (Johnson & Johnson): I'm not one to position my portfolio based upon the fear of a recession around the corner. I have over three decades until retirement will hit, and have plenty of time to ride the economy's cycles. That's why I don't personally own my pick today: Johnson & Johnson.

But if I were in retirement, Johnson & Johnson would be at the top of my list for potential stocks. The company has three divisions, all protected by different moats:

  1. Consumer goods: The power of brand names like Band-Aid and Tylenol give Johnson & Johnson pricing power over its competition.
  2. Medical devices: When a hospital buys Johnson & Johnson's devices -- often geared to surgery or orthopedics -- it is making a large investment that makes switching to different devices painful financially.
  3. Pharmaceuticals: Led by arthritis medicine Remicade, this division is protected -- for a time -- by patents.

While spending might subside during a recession, all of these are necessary contributions to the medical world no matter the economic climate.

Currently, Johnson & Johnson offers a solid 2.5% dividend yield. Over the past 12 months, only half of the free cash flow has been used on the payout, meaning it both is safe during a downturn, and has lots of room for future growth.

A proven record in hard times

Rich Duprey (Wal-Mart): Supermarkets generally can do well during recessions because, as the saying goes, people still have to eat. But Wal-Mart -- which sells groceries and so much more -- fares better than most because of the value proposition it brings to the everyday lives of consumers, by allowing them to stretch their budget. In periods of relative prosperity Wal-Mart does well, though with some ups and downs as competitors try to take away its share, but when crisis strikes, as it did during the Great Recession, then we get to see just how resilient the retail giant is.

Yet Wal-Mart is also a global giant, meaning it isn't very dependent upon a single region's economy. Moreover, during the last big market downturn, the retailer increased its dividend twice, a nice salve for investors who may have been otherwise bruised. The dividend currently yields 2.6%, and with a payout ratio of 48.6%, the dividend has plenty of room for further growth while remaining safe from being suspended or cut. In short, expect Wal-Mart to thrive in the next bear market, just as it did in the last.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.