Most investors like it when stocks go up. That's understandable since we all invest with the goal of making money and growing our income streams.
The good news is that stocks go up 76% of all years.
There are few guarantees on Wall Street. In fact, studies show that just two things are a long-term certainty.
Today many investors are terrified at the prospect of stagflation, high inflation, and slow growth, causing the Fed to raise rates to the sky and resulting in a potential lost decade for stocks.
Stagflation does indeed hurt market returns, but the good news is that not even 20 years of high inflation has caused the US market to fail to deliver positive returns.
During the late 1940s, we had 20% inflation after WWII, the highest in US history.
From 1929 (an epic bubble top) through 1949 we had the Great Depression, four recessions, WWII, and 20% inflation.
And stocks still delivered positive real returns. Unless you think we're facing an apocalypse or that the future will be bleaker than 1929 to 1949, staying invested for the long term is the smart call.
And let's not forget that bear markets are the best time to buy the world's best companies and lock in Buffett-like returns from blue-chip bargains hiding in plain sight.
Are we headed for a recession in 2023?
But guess what? Even if we get a recession in 2023, it's likely to be mild.
Deutsche Bank was the first blue-chip economist team to forecast a recession in 2023.
Deutsche Bank calls this a "severe" recession, but in 2023 they expect -0.5% growth.
In other words, the recession that appears likely (though the bond market disagrees at the moment) next year is likely to be one of the softest "hard landings" in history.
And guess what? The bluest of blue-chips, the dividend aristocrats, are also trading at bargain-basement prices if you know where to look.
Some are already priced at valuations you only see at the bottom of severe recessionary bear market lows.
Except that the economy is still strong for now and the recession of 2023 that most people expect is very likely to be one of the mildest in history.
The intelligent investor is a realist who buys from pessimists and sells to optimists." - Ben Graham, The Intelligent Investor
Or to put it another way, Mr. Market has become so pessimistic that many of the world's best companies are crazy, stupid, cheap.
Wait for a fat pitch and then swing for the fences." - Warren Buffett
So today I want to share with you five incredible high-yield dividend aristocrat bear market bargains.
These are some of the world's safest and most dependable dividend growth blue-chips that are so undervalued analysts think they will deliver:
I've linked to deep-dive articles fully analyzing each company's investment thesis, growth outlook, risk profile, valuation, and total return profile.
In a second I'll summarize why these are some of the best bear market aristocrat bargains, but here's the bottom-line up front.
If SWK grows as expected and returns to historical fair value, the most undervalued dividend aristocrat could deliver:
If PII grows as expected and returns to historical market-determined fair value, it could deliver:
If VFC grows as expected and returns to historical market-determined fair value, it could deliver:
If MO grows as expected and returns to historical market-determined fair value, it could deliver:
If LOW grows as expected and returns to historical market-determined fair value, it could deliver:
These aren't just blue-chips; they collectively are Ultra SWANs, as close to perfect quality companies as exist on Wall Street.
How can we confirm that? By comparing their quality to the aristocrats themselves.
|Metric||Dividend Aristocrats||5 Aristocrat Bargains||Winner Aristocrats|| |
Winner 5 Aristocrat Bargains
|Long-Term Risk Management Industry Percentile||67%- Above-Average||70% Good||1|
|Average Credit Rating||A- Stable||A- Stable||1||1|
|Average 30-Year Bankruptcy Risk||3.01%||3.25%||1|
|Average Dividend Growth Streak (Years)||44.3||48.6||1|
|Average Return On Capital||100%||173%||1|
|Average ROC Industry Percentile||83%||89%||1|
|13-Year Median ROC||89%||121%||1|
(Source: Dividend Kings Zen Research Terminal)
Ben Graham considered a 20+ year dividend growth streak to be an important sign of excellent quality. These aristocrats average almost 50 years, nearly a dividend king portfolio.
Joel Greenblatt is one of the greatest investors in history.
He considers return on capital to be his gold standard proxy for quality and moatiness.
S&P estimates the average bankruptcy risk over the next 30 years at 3.25% basically matching the aristocrat's A- stable credit rating.
And six rating agencies estimate these aristocrats' long-term risk-management is in the top 30% of their peers.
|Classification||Average Consensus LT Risk-Management Industry Percentile|| |
|S&P Global (SPGI) #1 Risk Management In The Master List||94||Exceptional|
|Strong ESG Stocks||78|| |
Good - Bordering On Very Good
|Foreign Dividend Stocks||75||Good|
|5 Aristocrat Bargains||70||Good|
|Low Volatility Stocks||68||Above-Average|
|Master List average||62||Above-Average|
|Monthly Dividend Stocks||60||Above-Average|
(Source: DK Zen Research Terminal)
The 4.2% yield these aristocrats offer isn't just very safe, it's some of the safest high-yield on earth.
|Rating||Dividend Kings Safety Score (162 Point Safety Model)||Approximate Dividend Cut Risk (Average Recession)|| |
Approximate Dividend Cut Risk In Pandemic Level Recession
|1 - unsafe||0% to 20%||over 4%||16+%|
|2- below average||21% to 40%||over 2%||8% to 16%|
|3 - average||41% to 60%||2%||4% to 8%|
|4 - safe||61% to 80%||1%||2% to 4%|
|5- very safe||81% to 100%||0.5%||1% to 2%|
|5 Aristocrat Bargains||94%||0.5%||1.3%|
|Risk Rating||Low-Risk (70th industry percentile risk-management consensus)||A- Stable outlook credit rating 3.25% 30-year bankruptcy risk|| |
20% OR LESS Max Risk Cap Recommendation (Each)
(Source: DK Research Terminal)
The average probability of these aristocrats cutting their dividends in a historically average recession since WWII is approximately 0.5%. The probability in a severe recession (Pandemic or Great Recession level) is approximately 1.3%.
Ok, so now that you understand why I own all of these aristocrats, here's why you might want to buy them today.
The S&P 500 trades at 15.9X forward earnings, a 6% historical discount.
These aristocrats trade at 11.2X forward earnings, a 41% historical discount to fair value.
Analysts expect 42% total returns in just the next 12 months, and they are so undervalued that a 72% total return would be justified by fundamentals.
Or to put it another way, if these aristocrats grow as expected and return to fair value, they could soar 72% and not become overvalued.
That's the power of deep value aristocrat bargain hunting in a bear market.
So that's why it's potentially worth buying these aristocrats today. But here's why they are worth owning for the long term.
For context, private equity and Cathie Wood at ARK are trying to achieve 15+% long-term returns.
To do that, they buy highly speculative tech companies or lock up investor money for 7 to 15 years with complex illiquid investments.
OR... you can buy these five aristocrats, some of the world's best and 100% liquid companies.
Not only do they yield one of the safest 4.2% yields on earth (2.5X more than the S&P 500), but they are growing at 13.1% and analysts expect 17.2% long-term returns.
Adjusting the risk of these companies not growing as expected, going bankrupt, and inflation, you can realistically expect them to double your money every 8.4 years.
|Investment Strategy||Yield||LT Consensus Growth||LT Consensus Total Return Potential||Long-Term Risk-Adjusted Expected Return||Long-Term Inflation And Risk-Adjusted Expected Returns||Years To Double Your Inflation & Risk-Adjusted Wealth|| |
10-Year Inflation And Risk-Adjusted Expected Return
|5 Aristocrat Bargains||4.2%||13.06%||17.2%||12.1%||9.6%||7.5||2.50|
(Sources: Morningstar, FactSet, YCharts)
Analysts expect these high-yield aristocrats to outperform not just the S&P and aristocrats over time but every major investment strategy, including the Nasdaq.
What does that potentially mean for you?
|Time Frame (Years)||7.6% CAGR Inflation-Adjusted S&P Consensus||8.4% Inflation-Adjusted Aristocrats Consensus||14.7% CAGR Inflation-Adjusted 5 Aristocrat Bargain Consensus||Difference Between Inflation-Adjusted 5 Aristocrat Bargain Consensus Vs S&P Consensus|
(Source: DK Research Terminal, FactSet)
Analysts and the bond market expect these aristocrats to potentially double the market's annual inflation-adjusted returns over time.
That means a potentially life-changing amount of wealth compounding.
|Time Frame (Years)||Ratio Aristocrats/S&P Consensus||Ratio Inflation-Adjusted 5 Aristocrat Bargain Consensus vs S&P consensus|
(Source: DK Research Terminal, FactSet)
These aristocrats are expected to potentially outperform the S&P and Nasdaq by 2X over the next 10 years, almost 4X over the next 20, and possibly as much as 7X over the next 30 years.
OK, so the world's best companies, trading at a 40% discount and 11X earnings, and the potential to double the market's real returns for years or even decades.
Sounds great in theory. But what evidence do we have that these aristocrats can deliver anything close to 17% long-term returns?
The future doesn't repeat, but it often rhymes - Mark Twain
Past performance is no guarantee of future results, but studies show that blue-chips with relatively stable fundamentals over time offer predictable returns based on yield, growth, and valuation mean reversion.
So how did these aristocrats do over the last 35 years, when 97% of the returns were the results of fundamentals, not luck?
Including the 24% decline in 2022 (the reason these aristocrats are such bargains today) these Ultra SWANs have delivered 16% annual returns over the last 35 years.
What if we smooth out for bear markets?
What do analysts expect in the future? 17.2% annual returns. What did these aristocrats deliver over the last 35 years? Average 15-year rolling returns of 17.2%.
That's double the S&P 500's 8.1% return. Analysts expect 2X the market's returns in the future, just like they've delivered for the last 35 years.
From bear market lows, they are capable of as much as 23% annual returns for the next 15 years.
And what about income growth?
|Portfolio||1988 Income Per $1,000 Investment||2022 Income Per $1,000 Investment||Annual Income Growth||Starting Yield||2021 Yield On Cost|
|5 Aristocrat Bargains||$27||$6,952||17.73%||2.7%||695.2%|
(Source: Portfolio Visualizer Premium)
How does 18% annual income growth sound? That's on par with what the Nasdaq has delivered over the last 20 years but from a group of companies that yields 4X as much.
What about the future? Here's what analysts expect.
|Analyst Consensus Income Growth Forecast||Risk-Adjusted Expected Income Growth||Risk And Tax-Adjusted Expected Income Growth|| |
Risk, Inflation, And Tax Adjusted Income Growth Consensus
(Source: DK Research Terminal, FactSet)
Analysts expect 19% annual income growth. Adjusting for the risk of these companies not growing as expected, inflation, and taxes you can reasonably expect 8.8% long-term real income growth.
Now compare that to what they expect from the S&P 500.
|Time Frame||S&P Inflation-Adjusted Dividend Growth||S&P Inflation-Adjusted Earnings Growth|
|1981-2021 (Modern Falling Rate Era)||2.8%||3.8%|
|2008-2021 (Modern Low Rate Era)||3.5%||6.2%|
|FactSet Future Consensus||2.0%||5.2%|
(Sources: S&P, FactSet, Multipl.com)
What about a 60/40 retirement portfolio?
In other words, these 5 dividend aristocrat bargains offer:
This is the power of dividend aristocrat bargain hunting in a bear market.
Don't get me wrong, I'm not saying that if stocks keep falling, these five aristocrat bargains can't get cheaper.
Dividend safety and fundamental quality have zero to do with short-term price volatility.
During periods of market turmoil, the world's safest dividend blue-chips keep growing their dividends but they can fall a lot.
But while they can be highly volatile at times, they also tend to recover faster.
After the Great Recession, when they fell 47%, they recovered to new record 2 years earlier than the S&P 500.
Through a prudent allocation to cash and bonds, you can turn these five Ultra SWAN aristocrat bargains into a recession-optimized ultra sleep well at night retirement portfolio.
One that historically has beaten the market with double-digit returns, but with 30% less annual volatility, and half the peak decline of the S&P during the 2nd bigger market crash in US history.
This ZEUS deep value aristocrat portfolio delivered 56% better inflation-adjusted returns than a 60/40 and with smaller peak declines in even the most extreme market crashes.
Market and 60/40 beating returns with much higher and safer yield and lower volatility? Now we're cooking with gas.
By adding cash and bonds and a high-yield ETF, we built a wonderfully diversified and prudently risk-managed Ultra SWAN portfolio. One that cut the peak pandemic decline by 66%.
What about future volatility?
Including a 4% annual withdrawal rate (2.6% is the safe withdrawal rate for the 60/40 according to FactSet), this portfolio is 80% statistically likely to deliver 6.5% to 9.8% long-term inflation-adjusted returns.
Are you worried about rising interest rates, inflation, recession, and one of the most volatile stock markets we've ever seen?
Don't you wish you could trust your hard-earned savings to experts who have an impeccable track record of growing very safe dividends in all economic and market conditions, for over 35 years?
Well then LOW, SWK, PII, VFC, and MO might be just what you're looking for.
Whether you buy these aristocrats separately, together, or combined with a prudent allocation to other ETFs, cash, and bonds, the point is clear.
Fortunes are made in bear markets." - Todd Sullivan
"Be greedy when others are fearful." - Warren Buffett
"Luck is what happens when preparation meets opportunity." - Seneca
If you want to retire rich and stay rich in retirement, you need to take charge of your financial destiny and make your own luck on Wall Street.
And by focusing on safety and quality first, and prudent valuation and sound risk management always, retiring in safety and splendor becomes a function of time, patience, and discipline... not luck.
Dividend Kings helps you determine the best safe dividend stocks to buy via our Automated Investment Decision Tool, Zen Research Terminal, Correction Planning Tool, Company Screener, and Daily Blue-Chip Deal Videos.
Membership also includes
Click here for a two-week free trial so we can help you achieve better long-term total returns and your financial dreams.
This article was written by
Adam Galas is a co-founder of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 5,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.
The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha).
I'm a proud Army veteran and have seven years of experience as an analyst/investment writer for Dividend Kings, iREIT, The Intelligent Dividend Investor, The Motley Fool, Simply Safe Dividends, Seeking Alpha, and the Adam Mesh Trading Group. I'm proud to be one of the founders of The Dividend Kings, joining forces with Brad Thomas, Chuck Carnevale, and other leading income writers to offer the best premium service on Seeking Alpha's Market Place.
My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives.
With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and safe and dependable income streams in all economic and market conditions.
Disclosure: I/we have a beneficial long position in the shares of LOW, SWK, PII, VFC, MO either through stock ownership, options, or other derivatives. 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.
Additional disclosure: Dividend Kings owns LOW, SWK, PII, VFC, and MO in our portfolios.