The Best Dividend Stocks To Buy Ahead Of The Coming Bear Market (2024)

(Source: imgflip)

Due to reader requests, I've decided to break up my weekly "Best Dividend Stocks To Buy This Week" series into two parts.

One will be the weekly watchlist article (with the best ideas for new money at any given time). The other will be the update on the Deep Value Dividend Growth Portfolio (which is beating the market by over 3% after 14 weeks).

To also make those more digestible, I'm breaking out the intro for the weekly series into a revised introduction and reference article on the 3 rules for using margin safely and profitably (which will no longer be included in those future articles).

I'm also tracking updates to my new Bunker Dividend Growth Portfolio (100% undervalued dividend aristocrats and kings) anytime there is a change to that portfolio.

And, this week, I explained how I recession proofed my retirement portfolio (as part of my quarterly retirement portfolio update).

Why Valuation Matters

Even the best companies can make terrible investments if you overpay. A Yale study looking at market returns from 1881 to 2016 found that starting P/E ratio had a significant effect on total returns out to 30 years. In other words, buy-and-hold investors can't just blindly buy great companies at any price but need to remember Buffett's famous quote "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

The corollary to that quote is what I call "the Buffett rule," which is to never pay more than fair value for even the highest-quality companies. Doing so will lower your total returns, and since something great is always on sale, there is no reason to jump the gun on buying quality, low-risk dividend stocks.

After all, patience is the ultimate virtue of the long-term investor, because as Buffett also said, "the stock market is designed to transfer money from the active to the patient."

But there's another reason why valuation is always worth keeping in mind.

(Source: Ploutos Research) Note: Data current through February 2019

Value investing is one of the proven "alpha factors" that consistently beat the market over time. That includes January's rally (the strongest S&P returns in January in 32 years) when value stocks were the best alpha strategy of all.

Of course, value investing doesn't work all of the time - no investing strategy does.

Probability Of The Strategy Underperforming The S&P 500 Over Rolling Time Periods

(Source: Advisor Perspectives)

But it's precisely because all investing strategies go through periods of underperformance that alpha factors keep working over decades. If any single approach could guarantee market-beating returns year in and year out, then everyone in the world would use it, and thus, the strategy would lose its edge.

Ok, so maybe value investing is great, and valuation is worth keeping in mind before buying any stock. But how does one find great companies trading at Buffett's mythical "fair value." Well, there are many approaches, but I personally consider three the most useful for long-term dividend growth investors.

Using these three valuation methods can tell us what are the best quality dividend growth stocks to buy in March.

Discounted Cash Flow

Fundamentally, any company is worth the present value of all its future cash flow. That's as basic a valuation method as you can get. However, in reality, the future is uncertain, and the discount rate you use, as well your growth assumptions, can make a DCF model say pretty much anything you want.

This is why I consider Morningstar's 100% long-term, fundamentals-driven and conservative analysts to be a great source of DCF estimated fair values.

(Source: Morningstar) Note: "Q" indicates valuation relative to industry peers - data as of March 22nd

Those analysts generally assume slower growth than the analyst consensus and even sometimes management itself. As a result, Morningstar four and five star-rated companies can be thought of as "strong buy" or "very strong buy" recommendations, respectively, from analysts whom I consider among the best in the business.

Above, you can see the top-rated companies that my Deep Value Dividend Growth portfolio owns. Every company presented here is one that my own long-term, valuation-adjusted total return model (based on the one Brookfield Asset Management has been using for decades) expects to generate at least 13% long-term total returns (margin of error 20%).

Note that only the companies with "5-star prices" are ones that Morningstar has done a deep dive on. The "Q" rated companies are merely compared to their peer groups, and thus, not necessarily as reliable.

Want a more quantitative approach to DCF? Well, here are my DVDGP holdings ranked by price/fair value, based on DCF.

(Source: Morningstar) Note: "Q" indicates valuation relative to industry peers - data as of March 22nd

Due to the likely coming recession, conservative income investors might want to stick not just to defensive sectors (such as consumer staples) but lower beta stocks such as

Dominion Energy
Altria
Enbridge
Walgreens

But DCF is far from the only valuation method you should consider.

Price-To-Earnings

Remember that Yale valuation study that looked at stocks based on P/E ratio? Well, the venerable P/E ratio is one of the most popular valuation approaches, and for good reason. While no valuation method is perfect, a good rule of thumb (from Chuck Carnevale, the SA king of value investing and founder of F.A.S.T Graphs) is to try not to pay more than 15 times forward earnings for a company.

(Source: TipRanks)

Chuck usually compares companies to their historical P/E ratios, and he's ranked in the top 1.4% of all analysts tracked by TipRanks (based on the forward 12-month total returns of his recommendations). While 12 months is hardly "long term," the point is that Mr. Carnevale is a fantastic value investing analyst, and so, his rule of thumb is well worth keeping in mind.

Here are DVDGP's portfolio holdings that have forward P/Es of 15 or less.

Please note that many of these companies are cyclical and economically sensitive (like energy, finance, semiconductors, and industrials). With a recession now likely next year, conservative income investors looking for smaller short-term losses will want to stick to defensive sectors like healthcare and consumer staples (including tobacco companies).

(Source: Morningstar) - data as of March 22nd

Note that stewardship rating is Morningstar's estimate of the quality of the management team. P = poor (DVDGP's policy is to avoid all such companies), S = standard (average to good), and E = exemplary (very good to excellent).

But while both DCF and forward P/E are great methods to value a company, personally, my absolute favorite, and what I use to invest my own money and make most of my recommendations, is Dividend Yield Theory, or DYT. This is how I create my five watchlists, which I intend to use to invest all my savings for the rest of my life.

The Best Dividend Growth Stocks You Can Buy Today

This group of dividend growth blue-chips represents what I consider the best stocks you can buy today. They are presented in five categories, sorted by most undervalued (based on dividend yield theory using a five-year average yield).

High yield (4+% yield)
Fast dividend growth
Dividend Aristocrats
Dividend Kings
My Bear Market Buy List (my master watchlist of quality dividend stocks worth owning)

The goal is to allow readers to know what are the best low-risk dividend growth stocks to buy at any given time. You can think of these as my "highest-conviction" recommendations for conservative income investors that represent what I consider to be the best opportunities for low-risk income investors available in the market today. Over time, a portfolio built based on these watchlists will be highly diversified, low-risk and a great source of safe and rising income over time.

The rankings are based on the discount to fair value. The valuations are determined by dividend yield theory, which Investment Quality Trends, or IQT, has proven works well for dividend stocks since 1966, generating market-crushing long-term returns with far less volatility.

(Source: Investment Quality Trends)

That's because, for stable business income stocks, yields tend to mean-revert over time, meaning cycle around a relatively fixed value approximating fair value. If you buy a dividend stock when the yield is far above its historical average, then you'll likely outperform when its valuation returns to its normal level over time.

My Bear Market Buy List (AKA "Master Watchlist")

These are the blue-chips which I expect will generate 13+% total returns at their target yields. Note that all total return estimates are on a 10-year annualized basis. That's because total return models are most accurate over longer time frames (5+ years) when prices trade purely on fundamentals and not sentiment. This allows valuations to mean-revert and allows for relatively accurate (80% to 95%) modeling of returns.

The list itself is ranked by long-term CAGR total return potential from target yield. Stocks at their target yield or better (bolded) are good buys today.

This week, I added PEP, GPC, and EOG, to the watchlist.

Company	Ticker	Current Yield	Fair Value Yield	Target Yield	Historical Yield Range	Long-Term Expected Cash Flow Growth (Analyst Consensus)	Long-Term Valuation Adjusted Annualized Total Return Potential At Target Yield
Antero Midstream Corp.	(AM)	9.3%	5.0%	5.0%	0.1% to 9.4%	22.0%	27%
Mastercard	(MA)	0.6%	0.7%	0.7%	0.1% to 0.8%	21.0%	21%
Skyworks Solutions	(SWKS)	1.8%	1.2%	2.0%	0.1% to 2.5%	13.5%	21%
Brookfield Asset Management	(BAM)	1.4%	1.5%	1.5%	1.1% to 4.2%	18.0%	20%
Lazard	(LAZ)	4.9%	2.8%	4.0%	0.8% to 4.8%	12.5%	20%
EOG Resources	(EOG)	0.9%	0.7%	0.7%	0.3% to 1.1%	19.0%	20%
Visa	(V)	0.7%	0.7%	0.7%	0.1% to 0.8%	17.0%	18%
Boeing	(BA)	2.3%	2.4%	2.4%	1.4% to 5.4%	15.9%	18%
Southwest Airlines	(LUV)	1.3%	0.8%	0.8%	0.1% to 1.3%	17.2%	18%
Lowe's	(LOW)	1.8%	1.7%	1.7%	1.2% to 2.5%	15.0%	17%
Pattern Energy	(PEGI)	7.7%	7.3%	7.3%	1.0% to 9%	10.0%	17%
Qualcomm	(QCOM)	4.4%	3.5%	4.5%	1.0% to 5.0%	9.8%	17%
British American Tobacco	(BTI)	6.6%	4.0%	6.0%	2.7% to 8.6%	5.5%	17%
Ameriprise Financial	(AMP)	2.9%	2.4%	2.6%	1.1% to 5.0%	11.8%	17%
NextEra Energy Partners	(NEP)	4.1%	3.9%	3.9%	0.4% to 5.4%	13.5%	17%
Atlantica Yield	(AY)	7.1%	5.9%	6.5%	0.9% to 10.4%	9.0%	17%
Vodafone	(VOD)	9.0%	5.7%	8.0%	3.9% to 13.7%	4.7%	17%
Oasis Midstream Partners (uses K1)	(OMP)	8.8%	4.4%	4.4%	2.1% to 11.5%	13.0%	17%
Texas Instruments	(TXN)	2.8%	2.5%	2.5%	0.9% to 3.5%	13.8%	16%
MPLX (uses k1)	(MPLX)	7.7%	6.1%	7.0%	0.5% to 9.3%	6.0%	16%
Citigroup	(C)	3.0%	2.3%	2.5%	0% to 78.6%	13.1%	16%
Goldman Sachs	(GS)	1.7%	1.3%	1.8%	0.7% to 2.6%	12.1%	16%
Philip Morris International	(PM)	5.0%	4.5%	6.0%	0.8% to 6.8%	6.8%	16%
Bristol-Myers Squibb	(BMY)	3.4%	2.6%	3.0%	2.0% to 7.1%	11.3%	16%
American Tower	(AMT)	1.9%	1.9%	1.9%	0.6% to 2.1%	15.1%	16%
S&P Global	(SPGI)	1.1%	1.3%	1.3%	0.6% to 5.0%	14.2%	16%
Home Bancshares	(HOMB)	2.9%	1.5%	2.0%	0.7% to 2.8%	10.2%	15%
TD Ameritrade	(AMTD)	2.4%	1.7%	2.0%	0.2 to 2.4%	10.0%	15%
Microsoft	(MSFT)	1.6%	2.6%	2.6%	1.1% to 3.1%	12.3%	15%
ONEOK	(OKE)	5.0%	5.1%	5.1%	2.4% to 12.8%	10.0%	15%
Essential Properties Realty Trust	(EPRT)	4.4%	5.0%	5.0%	1.5% to 6%	10.0%	15%
American Express	(AXP)	1.4%	1.5%	2.0%	0.7 to 8.7%	10.0%	15%
Brookfield Infrastructure Partners (uses K1)	(BIP)	5.0%	4.6%	4.6%	3.7% to 8%	10.0%	15%
EQM Midstream Partners (uses K1)	(EQM)	10.3%	4.1%	5.5%	0.9% to 10.7%	7.0%	15%
Lincoln National Corp	(LNC)	2.6%	1.7%	2.2%	0.1% to 27.1%	10.0%	15%
CVS Health	(CVS)	3.6%	1.8%	2.5%	0.6% to 3.3%	8.0%	14%
BlackRock	(BLK)	3.2%	2.5%	2.5%	1.2% to 3.5%	11.3%	14%
Energy Transfer LP (uses K1)	(ET)	7.9%	6.4%	6.4%	2.2% to 18.3%	7.9%	14%
A.O Smith	(AOS)	1.7%	1.1%	1.6%	0.8% to 3.4%	8.9%	14%
Noble Midstream Partners (uses a K1)	(NBLX)	6.4%	3.9%	3.9%	0.8% to 7.4%	10.3%	14%
QTS Realty Trust	(QTS)	4.0%	3.2%	3.2%	0.9% to 4.7%	11.0%	14%
TransCanada	(TRP)	4.7%	3.9%	4.5%	3.1% to 5.9%	8.0%	14%
Magellan Midstream Partners (uses K1)	(MMP)	6.5%	4.6%	6.0%	2.7% to 12.0%	5.2%	14%
Apple	(AAPL)	1.5%	1.7%	2.0%	0.4% to 2.8%	10.0%	14%
Brookfield Renewable Partners (uses K1)	(BEP)	6.6%	5.7%	6.5%	3.8% to 8.4%	6.5%	14%
TerraForm Power	(TERP)	5.8%	5.0%	6.0%	0.5% to 16.3%	6.5%	14%
Iron Mountain	(IRM)	7.0%	6.0%	6.0%	0.2% to 8%	7.2%	14%
Bank of America	(BAC)	2.2%	1.8%	2.0%	0.2% to 59.1%	10.5%	14%
Equinix	(EQIX)	2.2%	2.1%	2.2%	0.6% to 2.5%	10.0%	14%
Roper Technologies	(ROP)	0.6%	0.6%	0.8%	0.3% to 1.0%	10.0%	14%
Synchrony Financial	(SYF)	2.6%	1.8%	2.4%	0.4% to 2.9%	8.2%	14%
Discover Financial	(DFS)	2.3%	2.0%	2.5%	0.3% to 4.9%	8.0%	14%
Zoetis	(ZTS)	0.7%	0.7%	0.7%	0.2% to 1.1%	13.1%	14%
Genuine Parts Company	(GPC)	2.8%	2.8%	3.4%	2.1% to 6.1%	8.5%	13%
Pepsi	(PEP)	3.1%	2.9%	3.5%	2.1% to 3.6%	7.7%	13%
General Dynamics	(GD)	2.5%	1.9%	2.3%	1% to 4.9%	9.8%	13%
McDonald's	(MCD)	2.5%	3.0%	3.5%	2.1% to 5.0%	8.0%	13%
Broadridge Financial	(BR)	1.9%	2.0%	2.2%	1.1% to 3.2%	10.2%	13%
Ameris Bancorp	(ABCB)	1.2%	0.8%	1.0%	0.2% to 7.7%	10.0%	13%
Stanley Black & Decker	(SWK)	2.0%	2.0%	2.0%	1.4% to 5.4%	11.0%	13%
Suncor Energy	(SU)	3.7%	3.0%	3.1%	0.4% to 4.0%	9.7%	13%
Intercontinental Exchange	(ICE)	1.5%	1.3%	1.4%	0.3% to 1.5%	12.6%	13%
Waste Management	(WM)	2.0%	2.6%	2.6%	1.9% to 4.7%	10.7%	13%
EPR Properties	(EPR)	5.9%	6.1%	7.3%	4.5% to 24.8%	4.0%	13%
Merck	(MRK)	2.7%	3.1%	3.3%	2.4% to 6.7%	9.4%	13%
Brookfield Property REIT	(BPR)	6.5%	5.0%	5.0%	1.2% to 8.4%	8.0%	13%
Enterprise Products Partners (uses K1)	(EPD)	6.0%	5.9%	6.0%	3.4% to 11.7%	7.0%	13%
Air Products And Chemicals	(APD)	2.5%	2.4%	2.4%	1.7% to 4.1%	12.3%	13%
Jack Henry & Associates	(JKHY)	1.2%	1.3%	1.5%	0.9% to 2.1%	10.5%	13%
Dominion Energy	(D)	4.9%	3.8%	4.3%	3% to 5.8%	6.7%	13%
Disney	(DIS)	1.6%	1.5%	2.0%	0.9% to 2.2%	8.5%	13%
Emerson Electric	(EMR)	2.9%	3.2%	3.5%	1.9% to 5%	9.0%	13%
Chevron	(CVX)	3.9%	3.9%	4.6%	2.3% to 5.7%	7.0%	13%
Broadcom	(AVGO)	3.6%	3.0%	3.0%	0.2% to 4.6%	10.0%	13%
Home Depot	(HD)	2.9%	2.1%	2.3%	1.6% to 5%	10.0%	13%
3M	(MMM)	2.8%	2.5%	2.7%	1.8% to 4.8%	10.0%	13%
JPMorgan Chase	(JPM)	3.2%	2.6%	3.5%	0.4% to 7.6%	6.5%	13%
LeMaitre Vascular	(LMAT)	1.1%	1.1%	1.1%	0.3% to 2.0%	12.0%	13%
Lam Research	(LRCX)	2.5%	2.4%	3.0%	0.3% to 3.6%	8.0%	13%
TELUS	(TU)	4.5%	4.1%	5.0%	3.3% to 6.3%	6.5%	13%
Digital Realty Trust	(DLR)	3.6%	3.9%	4.3%	2.5% to 7%	8.0%	13%
LyondellBasell Industries	(LYB)	4.7%	3.6%	4.5%	0.2% to 4.9%	6.7%	13%
CyrusOne	(CONE)	3.5%	3.3%	3.3%	0.7% to 3.8%	10.0%	13%
Simon Property Group	(SPG)	4.6%	3.4%	4.4%	2.4% to 14.6%	6.3%	13%
Crown Castle	(CCI)	3.6%	3.9%	4.5%	0.5% to 4.4%	7.5%	13%
W.P. Carey	(WPC)	5.3%	6.1%	7.3%	3.4% to 10.9%	4.0%	13%
Welltower	(WELL)	4.5%	5.0%	6.5%	3.8% to 10.0%	4.0%	13%
STORE Capital	(STOR)	4.0%	4.7%	5.9%	0.5% to 5.7%	5.0%	13%
Realty Income	(O)	3.7%	4.6%	5.7%	3.3% to 11.2%	5.3%	13%
Average		3.6%	3.1%	3.5%		9.9%	15%

(Sources: Management guidance, GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, Dividend Yield Theory, Gordon Dividend Growth Model) Note: Margin of error on total return potential is 20%.

Note that the bolded stocks are all at target yield or better, meaning it's a great time to either add them to your portfolio or add to an existing position.

Bottom Line: A Recession Is Likely Next Year, So Focus New Money On Undervalued Blue-Chip Dividend Stocks

(Source: CNBC)

It's finally happened. The long-declining 10y-3m "bankers' yield curve" has now inverted officially signaling a recession is likely to start in nine to 16 months. This means that anyone looking to invest new money today should focus on undervalued blue-chip dividend stocks.

This weekly watchlist series is designed to be a tool to give you solid investing ideas, so you can always know what's the best place to put your hard earned money to work at any given time. Specifically, in companies with high margins of safety that have less to fall in a market correction, and which are all coiled springs that are likely to deliver outsized total returns if their valuations return to historical levels.

But be aware that a lot of the recommendations on these watchlists are economically sensitive, including industrials, energy, financials, and technology companies. While the active recommendations are trading at good to great valuations, they will likely still fall during a bear market that's not likely to begin this year.

Thus, if you are worried about avoiding large short-term losses, you might want to stick to more defensive sectors like consumer staples picks such as Altria and Walgreens. Dominion Energy and Enbridge are also low volatility, undervalued blue-chips that represent great investments to ride out the coming bear market while enjoying safe, generous, and growing income.

The good news is that the next recession is likely to be mild, and the bear market is likely to see stocks bottom around April/May 2020 (based on historical averages) 20% to 30% from September 2018's all-time high (16% to 26% below today's levels).

That will set up the next multi-year bull market, which armed with the right watchlists, you can profit handsomely from.

This article was written by

Dividend Sensei

111.14K

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Dividend Sensei (Adam Galas) is an Army veteran and stock analyst with 20+ years of market experience.

He is a founding author of the investing group The Dividend Kings which focuses on helping investors safeguard and grow their money in all market conditions through the highest-quality dividend investments. Dividend Sensei and the team of analysts (Brad Thomas, Justin Law, Nicholas Ward, Chuck Carnevale, and Sebastian Wolf) help members invest more intelligently in dividend stocks. Features include: 13 model portfolios, buy ideas, company research reports, and a thriving chat community for readers looking to learn how to invest more intelligently in dividend stocks. Learn more.

Analyst’s Disclosure: I am/we are long ENB, KIM, BPY, BLK, ITW, TXN, AOS, AAPL, ABBV, BEP, MMM, LEG, WBA, EPD, MMP, ET, GS, XOM, MPLX, V, MA, BIP, TERP, IRM, HD, SWKS, PM, OKE, C, AMT, BAM, LRCX, JPM, BAC, AMGP, LYB, BTI, TU, SPG, AMTD, BA, CONE, LOW, BMY, AMP, QTS, AY, EQIX, SWK, EPRT, GD, D., LAZ, QCOM, CVS, VOD, APD, HOMB, SYF, OMP, NBLX, EQM, SU, ABCB, LUV, PEGI, LNC, ICE, EOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Company	Ticker	Sector	Yield	Fair Value Yield	Historical Yield Range	Discount To Fair Value	Expected 5 Year Annualized Cash flow Growth	Valuation Adjusted Total Return Potential
Cardinal Health	(CAH)	Healthcare	3.9%	2.1%	0.9% to 3.9%	42%	4.8%	14.0%
Walgreens Boots Alliance	(WBA)	Consumer Staples	2.8%	1.9%	1.0% to 3.1%	34%	9.5%	16.1%
AbbVie	(ABBV)	Healthcare	5.4%	3.6%	0.9% to 5.5%	33%	8.5%	17.4%
Illinois Tool Works	(ITW)	Industrials	2.8%	2.1%	1.6% to 4.5%	25%	4.9%	10.6%
General Dynamics	(GD)	Industrials	2.5%	1.9%	1.0% to 4.9%	21%	9.8%	14.2%