8 Defensive Dividend Stars That Could Help You Retire Rich

Summary

• Most people are far behind on their retirement goals - often without realizing it.
• In this article, I present conservative dividend growth investing as a suitable way to achieve long-term financial goals with subdued risks (getting rich slowly).
• In light of this, I present eight stocks that have fantastic conservative dividend growth characteristics suitable to help you and me reach our financial goals.

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Introduction

In this article, we'll do two things.

First, we start with a discussion of the importance of successful investing, given the looming retirement funding gap in the future. Moreover, as we're once again in a volatile bear market, I want to highlight why it's so important to focus on conservative/defensive dividend growth stocks to get the job done.

Second, I will present a model portfolio of eight individual stocks that gets the job done. The goal is to present some fantastic dividend stocks that might suit your portfolio and the possibilities that come with investing in somewhat boring names. When done correctly, investors get a perfect mix between potential outperformance and subdued volatility.

So, without further ado, let's dive into the world of defensive dividend investing and discover how it can help you achieve your long-term investment goals.

A Looming Gap & Increased Volatility

The importance of defensive long-term investing.

Last year, Bankrate published a survey showing that 52% of Americans believe they are behind on their retirement goals. Only 35% of respondents believed to be either on track or ahead of their plan.

Bankrate Survey

While I'm using Americans as an example, it's safe to assume that this is becoming an increasingly prevalent issue in many nations. After more than a decade of depressed interest rates, pension savings have fallen short of expectations.

Interestingly, younger respondents seem to be less aware of the shortfall in their retirement savings. Despite the growing concern, the belief that they are falling behind is less common among younger age groups.

I believe this is mainly due to the fact that younger people aren't planning that far ahead.

Bankrate Survey

Furthermore, what's interesting is why people feel they are behind. Only 7% answered a lack of desire or need to invest for retirement. A majority felt pressured by inflation. Given that inflation has only gotten worse since then, I think we can all get behind that reason.

Other reasons were related to high inflation, as they included a stagnant or reduced income, new expenses, the need to keep more cash on hand, and higher debt costs.

Bankrate Survey

Roughly 18% of respondents noted high market volatility. This, too, is still a major issue.

As I wrote in a recent macro-focused article, we're in an incredibly tricky situation thanks to a mix of slowing economic growth and persistent inflation, forcing the Fed to stick to its hawkish agenda.

The other day, Morgan Stanley's (MS) Mike Wilson came out, making the case that we're in for significant earnings weakness.

Given my own view on markets, I agree with his assessment that the market is likely to provide us with buying opportunities down the road.

“Given the events of the past few weeks, we think guidance is looking more and more unrealistic, and equity markets are at greater risk of pricing in much lower estimates ahead of any hard data changes,” Wilson wrote in a note on Monday.

Financials and consumer retailers are among sectors that have already started to reprice, with valuations declining enough to present investment opportunities, Wilson said in an interview with Bloomberg Surveillence on Monday.

“We’re looking for opportunities at the stock level, but at the index level, it does not look attractive to us,” he said.

Mike Wilson, who was ranked No. 1 in last year's Institutional Investor survey, predicts the market will experience a cyclical bear market that will eventually reset valuations and bring estimates down.

Although the market has recovered losses due to expectations of a Fed pivot, Wilson points out the heightened risk of equities repricing based on the divergence between stock and bond market action.

In addition, Wilson argues that profit forecasts are overly optimistic, considering weaker growth and an underappreciated threat to margins from elevated inflation. This opinion is echoed by other experts, such as JPMorgan (JPM) analysts.

Bloomberg

Based on these numbers, it is more important than ever to invest in conservative dividend growth investments that let you sleep well at night and give you a shot at achieving your retirement goals (or whatever your financial goal might be).

I'm Going With Dividend Growth

A short background explaining the power of dividend growth.

As my regular readers are aware, my investment focus primarily revolves around dividend growth opportunities. This approach is rooted in their track record of long-term outperformance with lower volatility. In a recent article, I highlighted the strength of dividend growers using the chart below as evidence.

Hartford Funds

In that article, I highlighted some findings from a 2009 scientific paper that basically proved the same (using a sample of UK-based stocks).

• Consistent dividend payers outperformed the wider market on an equally weighted basis from 1986-2006, particularly when the minimum requirement is set at ten years of continuous growth.
• These stocks have lower variance of returns and have suffered smaller drawdowns over shorter durations.
• Market-capitalization weighted portfolios did not offer the same benefits as equally weighted portfolios, possibly due to a loss of diversification as a few large stocks dominated.
• Zero-dividend firms have demonstrated relatively poor returns and higher volatility than dividend-paying firms.

Hence, in this article, I decided to focus on consistent dividend growth.

However, this isn't just a random dividend growth article. This article is about defensive dividend growth stocks with wide-moat business models, anti-cyclical behavior, stellar balance sheets, and all the benefits that come with diversified dividend growth investing.

In other words, on top of helping us reach our financial goals, they also come with safety, protecting the wealth we already generated.

But first, I need to briefly discuss something else.

Survivor Bias

Something to be aware of when backtesting stocks.

When we consider model portfolios composed of individual stocks rather than ETFs, we must confront the issue of survivor bias. This is because when we select stocks for our portfolios, we typically choose the best-performing ones available.

When we subject these stocks to backtesting, the results are often impressive. However, it's important to note that even great stocks can experience substantial losses over time. By focusing solely on backtesting, we overlook these negative outcomes and fail to account for the possibility that any of the stocks we've included in our model portfolios could suffer similar losses. As a result, we still face significant risks despite our thorough analysis.

In other words, investors tend to focus on successful companies that have survived in the market without considering the ones that have failed. This can lead to a skewed view of the market and may result in poor investment decisions.

While there is no way to forward test stocks, we can mitigate some of these risks by including a wide variety of stocks from different sectors and companies that are very likely to continue to benefit from the factors that made them successful in the past. Once investors focus on that, they can significantly reduce the risks that come with survivor-biased stock picking.

This finally brings me to the stock selection of this article.

The 8 Stocks To Get The Job Done

Some of the best low-volatility/defensive stocks on the market to help us reach our targets.

Without any further ado, below is the list of stocks I included in my portfolio. Note that every single company operates in a defensive industry. The average dividend yield is 2.6%, and the average weighted dividend growth rate is close to 9%.

Name	Industry	Div. Yield	Div. 5Y CAGR	Payout Ratio	Moody's Credit Rating
NORTHROP GRUMMAN CORP (NOC)	Aerospace & Defense	1.5%	11.0%	26%	Baa1
MCCORMICK & COMPANY, INC (MKC)	Food & Tobacco	1.9%	9.2%	60%	Baa2
DUKE ENERGY CORP (DUK)	Electrical Utilities & IPPs	4.2%	2.6%	75%	Baa2
ABBOTT LABORATORIES (ABT)	Healthcare Equipment & Supplies	2.1%	12.3%	36%	A1
PEPSICO, INC. (PEP)	Beverages	2.6%	7.4%	67%	A1
LOCKHEED MARTIN CORP (LMT)	Aerospace & Defense	2.6%	8.7%	42%	A3
JOHNSON & JOHNSON (JNJ)	Pharmaceuticals	3.0%	6.1%	44%	Aaa
AMERICAN TOWER CORPORATION (AMT)	Residential & Commercial REIT	3.2%	17.5%	50%	Aaa

Click to enlarge

• Average portfolio dividend yield: 2.6%
• Average weighted dividend growth rate: 8.8%

As I cannot give you a detailed overview of each stock mentioned in this article, let me elaborate on why I picked the companies in the list above.

• I included two defense contractors. Both Lockheed Martin and Northrop Grumman are part of my dividend growth portfolio. I bought the stocks because of close to 100% government-related revenue (almost zero commercial exposure). Both companies are the backbone of NATO defense and are engaged in next-gen defense projects, ensuring long-term funding.

Data by YCharts

• I included two consumer defensive stocks. PepsiCo is well-known for its products, including Pepsi-branded sodas and a wide range of snacks, which dominate the snack aisle in many nations. While PEP does not have a high dividend yield compared to other defensives, it has consistently high growth, high pricing power, and growth markets in product niches and regions like Asia. McCormick also does not have a high yield. However, it has high and consistent dividend growth. The producer of spices has high pricing power and a secular tailwind called cooking-at-home-is-often-cheaper. The company is one of the stocks that never seem cheap. However, the company is consistently outperforming its peers and is a terrific addition to this portfolio.

Data by YCharts

• Duke Energy is the most boring addition. I own this stock in my dividend portfolio. This utility giant comes with a juicy yield, slow dividend growth, and a wide-moat business model consisting of high-value energy assets generating electricity for millions of Americans. While the company has slightly underperformed its peers over the past ten years, it comes with a higher dividend yield, which increases the average yield of this portfolio without adding more risk. That is also the reason why I own the stock.

Data by YCharts

• The portfolio includes two healthcare stocks. Abbott is a major healthcare supplier and innovation hub. Johnson & Johnson is a mega-cap drug manufacturer with a yield close to 3.0% and a fortress balance sheet. On a long-term basis, both stocks have outperformed their benchmark with low volatility and consistently grown their dividends. Over the past ten years, however, JNJ has underperformed its peers in the healthcare ETF (XLV). JNJ has shifted from growth to value, which is OK, as JNJ adds tremendous safety and a decent yield to the portfolio. I do not own either of them. However, I recently put Abbott on my watchlist. Feel free to read my article on this decision.

Data by YCharts

• The portfolio includes one REIT. American Tower may as well be called American Fortress, given its balance sheet. As I discussed in a recent article, AMT is the perfect mix between growth and value. The owner of global cell towers enjoys a huge cash-generating portfolio of towers and growth opportunities related to 5G, the Internet of Things, cloud computing (data centers), and urbanization in emerging markets.

Data by YCharts

With that said, let's take a look at the results.

Since January 1999, this equal-weight portfolio has returned 12.1% per year. This stellar performance has beaten the market by a wide margin, turning $10,000 into almost $160,000.

Portfolio Visualizer

Even more important, the standard deviation of this portfolio was just 12.7%, which is almost 300 points below the standard deviation of the market, pushing the Sharpe Ratio (risk-adjusted return) to 0.83. This is truly a phenomenal performance for a portfolio that does not include any bonds and comes with a decent yield and high long-term dividend growth.

As the chart below shows, a major reason for this massive outperformance is what happened in the early 2000s. Back then, the S&P 500 struggled with the implosion of tech stocks. This portfolio was not impacted by this.

Portfolio Visualizer

Nonetheless, this portfolio has beaten the market on a consistent basis. While the past three years saw some underperformance, the portfolio has beaten the market on a five and ten-year basis as well. Moreover, the volatility remained below average.

Portfolio Visualizer

This is what the returns of the portfolio's holdings looked like:

Portfolio Visualizer

Additionally, this portfolio has outperformed the market in every single market sell-off.

This portfolio never had a sell-off bigger than 31%. The market's largest sell-off was 51%. It took this portfolio just two years and 11 months to recover from the Great Financial Crisis. It took the S&P 500 almost five years.

Portfolio Visualizer

Additionally, this portfolio has provided consistently rising income for its investors. Dividend growth continued during the Great Financial Crisis, the 2015 manufacturing recession, the pandemic, and during current economic woes.

Portfolio Visualizer

With that said, here are a few more examples.

• Investors who invested $10,000 in this portfolio in 1999 with a $1,000 monthly investment would be sitting on $2.0 million right now (excluding taxes on dividends and capital gains for re-balancing purposes).
• Investors who invested $10,000 in this portfolio in 2015 while also adding $1,000 per month would have $180,000 right now. In other words, investors do not need to be extremely wealthy to generate a decent nest egg with this portfolio. It also shows (as we already knew) that this portfolio has generated consistent returns.

Takeaway

In this article, we started by discussing the importance of conservative long-term dividend growth investing. Not only is it extremely important that people start investing as early as possible, but it is also important to buy the right stocks. After all, I believe that getting rich slowly and carefully is the best way to avoid mistakes, steep drawdowns, and other issues that might prevent us from reaching our goals.

Hence, in addition to the theoretical framework, I presented eight stocks that I believe will get the job done. All stocks are extremely conservative and safe when it comes to their wide-moat business models and defensive industry characteristics. All stocks have decent yields and consistent dividend growth on top of fortress balance sheets.

While multiple ways lead to Rome, this stock selection has proven to get the job done. Moreover, I believe that these stocks will continue to provide outperforming wealth for investors with subdued volatility.

So, if you're in the market for high-quality dividend growth stocks and/or working on a strategy to reach your goals, I hope this article added some valuable input.

Thanks for your interest in my research! Stay tuned for the launch of my Investor Group Service in partnership with Seeking Alpha. Get access to my personal stocks, model portfolios, and exclusive research. Early subscribers will get a big discount. More details coming soon!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NOC, DUK, PEP, LMT 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.

Not financial advice.