Things can happen quickly on Wall Street. Investors have recently gone from inflation worries to outright recession fears after a flood of weak economic data followed the Federal Open Market Committee’s (FOMC) decision to keep interest rates unchanged through September. While no one knows what the market or the economy will do in the future, volatility is back in the markets and that could cause some bumps in the road in the coming months.
Investors began pouring into defensive investments, including stocks of companies that could withstand a recession.
These three blue-chip stocks should outperform most in a volatile market. They pay great dividends and have sustainable long-term growth prospects.
You can buy these names with confidence and keep them for the next 20 years.
Monthly dividends to pay your bills
Real estate income (NYSE: O) is poised to benefit from lower interest rates. Realty Income is a real estate investment trust (REIT); it acquires and leases properties and distributes its taxable income as dividends to shareholders. Realty Income stands out for a couple of reasons. First, the company focuses on single-tenant retail properties, such as leasing to businesses like convenience stores, grocery stores, movie theaters, and more. These tenants are all recession-proof businesses that pay reliable rents. Second, Realty Income signs net leases, meaning the tenant is responsible for maintenance, taxes, and insurance costs. As a result, Realty Income’s rental income is highly predictable.
Next, Realty Income pays monthly dividends, which is rare for U.S. companies. Dividends are about $3.16 per share, a 5.3% yield at current prices. Realty Income has also increased its dividend annually since going public, a 31-year streak. This includes increasing payouts during economic crises like the 2008-2009 financial crisis and the 2020 pandemic. Realty Income is truly battle-tested and continues to pay a higher dividend.
The stock has underperformed the market because of high interest rates; REITs like Realty Income borrow to fund growth, so high rates hurt their business. That trend could now reverse as the FOMC cuts rates. The stock trades at just 14 times funds from operations (REIT earnings), an attractive valuation for a high yield with a proven long-term growth track record.
People keep buying groceries
Food and beverages are a no-brainer for long-term investors. Companies like PepsiCo (NASDAQ: PEP) may not be setting the world on fire with growth, but slow and steady expansion has fueled sustainable investment returns for decades. PepsiCo sells its namesake soda, but is actually a conglomerate of food and beverage brands including Mountain Dew, Gatorade, Quaker, Frito Lay, Doritos, Cheetos and many more. You can find PepsiCo products in supermarkets around the world, making it hard for the company to have a bad year.
Given that context, it’s no surprise that PepsiCo is a great dividend stock. PepsiCo is a Dividend King, with more than five decades of consecutive dividend growth. The stock offers an excellent combination of income and upside thanks to its current yield of 3% and five years of annualized dividend growth between 6% and 7%. PepsiCo pays out about 66% of its earnings as dividends, giving PepsiCo enough cushion to invest in growth or weather an unexpected downturn.
While PepsiCo is recession-proof, management has noted that consumers have resisted price increases. As a result, the stock has fallen to a price-to-earnings (P/E) ratio of less than 22, compared to its five-year average of 26. The stock appears fairly valued today (not too expensive, but not cheap either). Investors looking for a long-term mainstay that can deliver slow and steady growth should consider PepsiCo a stock they can trust.
The leader in next generation nicotine products
The tobacco industry is not dead yet, but the sector is clearly in slow decline. Philip Morris International (NYSE: PM) has established itself as a leader in next-generation nicotine products, which include smokeless offerings such as vaping and heated tobacco devices, as well as oral nicotine pouches. Philip Morris began its journey into next-generation products in 2014 with IQOS and has built these innovations into a significant portion of the business. Today, IQOS and oral nicotine brand Zyn are driving growth as management milks the cigarette business for profit with steady price increases.
This renewed growth will ensure that Philip Morris will be showering investors with cash for decades to come. The stock is already a high-yielder, with a starting yield of 4.4%. Moreover, the payout should grow nicely, as analysts believe the company will grow earnings at a high-single-digit pace over the long term. Sales of organic smoke-free products grew by more than 18% year-over-year in Q2, showing just how much momentum these next-generation products have. Philip Morris is once again a growing company, despite the secular decline in smoking.
The stock is more expensive than it has been in recent years, with shares trading at a price-to-earnings ratio of 18 versus a five-year average of 17. However, the company’s growth, strong position in next-generation nicotine products and high starting dividend yield seem enough to justify a long-term investor buying shares.
Should You Invest $1,000 in Income Real Estate Now?
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Justin Pope has positions in Philip Morris International. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
3 Rising Stocks to Hold for the Next 20 Years was originally published by The Motley Fool
