Since its low point last October, the Dow Jones Industrial Average has put on a surprising display of strength, rallying 16% higher in the months that followed. Although many analysts and economists feel a recession could occur sometime early this year, investors would do well to buy stocks that could still rally higher while also protecting their downside.
In particular, dividend-paying stocks have proved their mettle over the past 100 years, with those on the S&P 500 never having a decade where they produced negative returns. Even during the so-called “lost decade” of the 2000s, where the dot-com implosion, 9/11, and the housing market collapse conspired to generate negative returns for the index, dividend stocks still managed gains.
The following stocks provide investors with the best of both worlds: a steady stream of income and the likelihood of capital appreciation.
If you have an office job, there’s a good chance you encounter the efforts of ABM Industries (ABM -1.50%), even if you don’t realize it. The company is the largest facility management services operator, which includes janitorial solutions such as maintenance and cleaning services. The business and industry segment provides more than half of its $7.8 billion in annual revenue and the majority of its operating profits. However, it has a growing presence in manufacturing, education, and aviation.
The forced closure of business due to the pandemic obviously created a rift in its long and steady growth trajectory. It could only partially offset this by launching a new sanitizing program called EnhancedClean as companies reopened. Since then, business has resumed its prior ramp and revenue rose 19% overall with a 42% increase in operating profits.
ABM Industries continues to expand by a combination of organic growth and acquisitions that increase its core capabilities, such as last year’s acquisition of RavenVolt, a provider of microgrid solutions for companies that need additional power generation capacity to support electric vehicle charging. It also continues to grow globally, such as its purchase of Dublin-based facility services leader Momentum Support.
While the cleaning and maintenance services specialist has been in business for well over 100 years, it has paid a dividend for more than 56 years and raised it for 50 consecutive years, making it a Dividend King. The payout currently yields 1.9% annually, and with a payout ratio of just 22% (meaning the amount of profits it returns to shareholders in the form of dividends), ABM Industries has a more than adequate margin of safety with plenty of room for future growth.
Defense contractor Raytheon Technologies (RTX -1.57%) is a dividend-paying giant that was created due to a merger of equals between Raytheon and United Technologies in 2020. Although United was the surviving company and had paid dividends every year since 1936, it changed its name to Raytheon Technologies. The dividend has been hiked for 29 straight years.
Although Raytheon is the second-largest defense contractor behind Lockheed Martin, only about half its revenue comes from the U.S. government. It has numerous foreign government contracts and a robust commercial aerospace business in Collins Aerospace and Pratt & Whitney. Yet it’s the U.S. military that provides near-term growth potential beyond the normal growth in Defense Department spending.
Because of the war in Ukraine, the U.S. has drawn down its inventory of critical defense weapons systems, including Stinger and Javelin missiles; high-speed, anti-radiation missiles (HARMS); and National Surface-to-Air Missile Systems (NASAMS). President Biden is also considering sending Patriot missile-defense systems to Ukraine. Raytheon is the primary contractor or partner in developing all of these weapons systems. Not only will there be the need to supply Ukraine with them, but the U.S. will also need to restore its own stockpiles.
It is a rare occurrence when military spending is cut; usually, it’s just the rate of growth that’s trimmed. But regardless of the amount spent in individual years, the long-term need for maintaining a strong military will ensure Raytheon Technologies is a stock for the long haul.
Rich Duprey has positions in Abm Industries and Raytheon Technologies. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.