After a rocky week in the stock market, as a trade standoff with China renewed volatility, shrewd investors might want to play some defense. Bring on the dividend stocks.

“It makes sense to be positioned a little more defensively right now,” says Thomas Huber, portfolio manager of the T. Rowe Price Dividend Growth fund (ticker: PRDGX). “You can make a good case for that. All you have to do is look back at the fourth quarter and see what happened.”

Stocks of companies that pay robust and growing dividends are generally less volatile in times of market turmoil—as was the case in last year’s fourth quarter, when the S&P 500 index lost 13.5%, dividends included. And dividends, especially those that are growing and are well covered by cash flows, can provide steady income in times of uncertainty.

Not all dividend stocks are the same, however. We found seven that investors should consider, ranging from a spice maker to a banking giant. Many of them have decent yields of 2% or higher, and they all possess good prospects for growing those payouts, thanks to strong free-cash flows and sound capital-allocation priorities by their managements.

The case for dividend stocks has rarely been stronger. Lower interest rates—especially with the Federal Reserve signaling that it will not raise rates this year—provide support by making bonds less of a threat to dividend stocks.

“With the Fed on hold, one of the principal arguments against dividend-paying stocks has disappeared,” says Jeremy J. Siegel, a finance professor at the Wharton School at the University of Pennsylvania and senior investment strategy adviser to WisdomTree, whose exchange-traded funds include dividend funds.

Dennis DeBusschere, head of portfolio strategy and quantitative research at Evercore ISI, says the bond market is pricing in “low and stable inflation expectations for at least 10 years,” meaning that investors are effectively able to earn more on short-term bonds while rolling them over, as opposed to holding a 10-year note until it matures. In other words, there’s minimal fear of inflation.

The Magnificent Seven

These seven companies, culled from interviews with several fund managers, should be able to keep growing their dividends.

“As long as that condition exists, stocks that can pay out significant cash flows to shareholders should attract capital,” he adds.

The S&P 500 was recently yielding around 2%, about what it has been offering for nearly a decade.

Another reason to favor dividend stocks now is concerns over weakening corporate profit growth—and how it could hurt stocks. When stocks decline, those dividends can be reinvested at a lower price.

“Where you’ve got slowing growth, that is an environment where it makes sense to focus on dividends as a source of return,” says Adam Virgadamo, equity strategist at Morgan Stanley.

He expects first-quarter earnings for S&P 500 companies to be flat, compared with those a year earlier. As of May 6, S&P 500 members that had reported first-quarter results had grown their earnings by 0.9%, on average, year over year, according to I/B/E/S data from Refinitiv.

As a result, some strategists are shifting their focus to dividend-oriented sectors. Morgan Stanley has an Overweight on three of the S&P 500’s 11 sectors: consumer staples, financials, and utilities. Utilities and consumer staples, which typically sport bigger yields than the overall market does, are traditional dividend havens. Those sectors were recently yielding 3.3% and 2.9%, respectively, above the market’s average.

Financials, which were yielding 2.1%, also boast options for income-seeking investors, as regulators in recent years have allowed those companies to return more capital to shareholders, thanks to improving fundamentals.

In an age when the hot stocks are often tech companies that eschew dividends, it can be easy to overlook the contributions that dividends make to total returns.

From January 1926 through the end of April, large-cap stocks had an annual return of 10.11%, compared with a price appreciation gain of 5.96%, according to Ibbotson Year Book and WisdomTree.

Dividends added more than four percentage points of return over that period.

More recently, from Feb. 28 of 2009, when stocks were close to their nadir in the wake of the financial crisis, through April 30 of this year, large-cap stocks had an annual return of 16.6%, compared with a price appreciation of 14.2%.

“Investors get beguiled by the share price and view it as the exclusive measure of a company’s success or failure, rather than balancing that with the distributable cash flows,” says Daniel Peris, a senior portfolio manager at Federated Investors.

Dividends can also help hedge against fairly high stock valuations and market volatility.

The fund that T. Rowe Price’s Huber runs was down 9.18% in the last three months of 2018, putting it more than four percentage points ahead of the S&P 500. The ProShares S&P 500 Dividend Aristocrats ETF (NOBL) fared even better, with a return of minus 8.74%. The Aristocrats, all S&P 500 members, have raised their payouts for at least 25 consecutive years. They include Johnson & Johnson (JNJ), Coca-Cola (KO), and Abbott Laboratories (ABT).

Market conditions could change, of course. Yet if inflation becomes a threat, stocks do have an advantage over bonds: In theory, they can increase dividends faster than the rate of inflation. Bond rates are often fixed.

If a downturn occurs, Siegel points out, stocks overall are well fortified. The S&P 500’s payout ratio—the percentage of earnings paid out as dividends—currently equals 34%, according to Goldman Sachs, below a 30-year average of 38%. The ratio has fallen over time, as companies have devoted more capital to buying back shares.

“The vast majority of firms could cover their dividend obligations,” Siegel says. “Some will cut, of course, but they’ve got a very good cushion now.”

High-yielding stocks are as cheap as they have been since the late 1990s, says Chris Senyek, chief investment strategist at Wolfe Research. But he prefers stocks that have better dividend growth and free-cash-flow yields, in part because “high-dividend yields can give you value traps.”

For example, CenturyLink (CTL), which slashed its dividend by 54% in February, was yielding more than 14% around that time.

The income component of a stock’s total return, as opposed to price appreciation and price/earnings ratio expansion, is likely to be more dependable as revenue growth is challenged.

Dividend Boost

Dividends have bolstered stock returns across varied markets, including the Great Depression.

There is also the strong positive signal that a dividend often sends in any market.

“If the company’s growing and throwing off a growing amount of cash flow, that means the dividend can grow over time,” says Paul Hogan, a portfolio manager at Fenimore Asset Management.

Some caution is in order, however. Valuations on dividend sectors, notably staples and utilities, “are elevated versus history on a relative and absolute basis, which tells you that this story of a slowing growth environment for earnings is one that’s fairly well understood by the market,” Virgadamo of Morgan Stanley notes.

The utilities in the S&P 500 recently traded at 18.4 times their current fiscal-year profit estimates, versus their five-year average of about 17 times, according to FactSet.

Still, holding the right dividend stocks makes strategic sense in this market. “It’s important to consider something that gives you a rising stream of income, but that gives you market exposure over time, so your assets can grow,” says Michael Barclay, a senior portfolio manager at Columbia Threadneedle Investments.

With that in mind, here are our seven dividend-stock picks:

Sempra Energy (SRE)

Utilities are popular among income-seeking investors, and many have been bid up.

Sempra Energy, which yields 3.1%, has a one-year return of about 20%. The stock is in the middle of its valuation range over the past five years, at nearly 20 times the $6 a share analysts expect it to earn this year, according to FactSet.

It operates two large regulated utilities in Southern California: San Diego Gas & Electric and Southern California Gas. And it has made investments to modernize and protect its electric and gas transmission and distribution systems from wildfires, says T. Rowe Price’s Huber. Another key asset is Oncor, a regulated Texas utility in which Sempra acquired a majority stake last year. That operation focuses on the transmission and distribution of electricity.

JPMorgan Chase (JPM)

Shares of the country’s largest bank by assets, yield 2.8%, well above the S&P 500’s average of about 2%.

Bank stocks generally haven’t done that well, but JPMorgan’s return of about 17% this year, through Thursday, puts it slightly ahead of the market’s gain.

JPMorgan has a “very diverse group of businesses that really allow it to operate through the economic cycle,” says Barclay, a manager of the Columbia Dividend Income fund (LBSAX).

As the impact of the financial crisis of a decade ago recedes, regulators have been allowing banks to return more capital, including dividends, to shareholders. Last September, JPMorgan declared a quarterly disbursement of 80 cents a share, a 43% boost.

With Jamie Dimon at the helm, JPMorgan has “been very good at investing over the past 10 years in each of their businesses to grow and strengthen them,” Barclay says. That bodes well for continuing to boost the dividend, as well.

NextEra Energy (NEE)

Investors in NextEra energy are buying into several businesses.

The largest is Florida Power & Light, a traditional regulated electric utility with more than five million customers across the Sunshine State. It contributed $2.6 billion of operating revenue in the first quarter—the most of any of the company’s units.

The clean-energy business, which includes wind- and solar-power generation, had $1.1 billion of operating revenue in the first quarter. The unit has many long-term contracts with customers, providing a stable revenue base.

The third and smallest of NextEra’s main operations is Gulf Power, a regulated electric utility that serves more than 460,000 customers in northwest Florida.

The stock, which yields 2.6%, has a one-year return of about 20%. It trades around 22 times the $8.41 it is expected to earn this year, above its five-year average of 19.3 times, according to FactSet.

The dividend should continue to climb. NextEra has “a growing utility business and a nonregulated growth platform with its renewable business,” says Huber of T. Rowe Price.

Air Products & Chemicals (APD)

Air Products makes industrial gases, including nitrogen and oxygen. That may not sound very exciting, but it has led to strong returns and reliable dividend growth. The company, an S&P 500 Dividend Aristocrat, raised its quarterly payout to $1.16 a share in January, from $1.10. The stock yields 2.3%.

CEO Seifollah Ghasemi told analysts in January that Air Products plans to return about $1 billion in cash to shareholders over the next year. In February, he said that “we are returning about half of our free cash to the shareholders in terms of the dividend.”

The company has said it wants to keep the yield at 2.5% to 3%, and it appears to have the financial capacity to do that.

The consensus profit estimate for Air Products’ current fiscal year, which ends in September, is $8.23 a share, up from $7.45 last year, according to FactSet.

Honeywell International (HON)

The industrial conglomerate, whose products range from thermostats to airplane cockpit systems, yields 1.9%.

But it has been growing its payout at good clip, and should be able to keep doing that as it evolves its business model and focuses more on higher-margin software.

Honeywell’s organic software revenue expanded by the midteens last year, and the company, under the leadership of Darius Adamczyk, wants to get the growth rate to 20%.

Honeywell’s free cash flow, or operating cash flow minus capital expenditures, totaled $5.6 billion in 2018, up from $4.9 billion the previous year. The company paid dividends of $3.06 a share on earnings of $8.01, leaving plenty of room for more increases. In September, Honeywell raised its annual dividend to $3.28 a share, a 10% increase.

McCormick (MKC)

This mid-cap consumer-staples outfit, which makes spices, seasoning mixes, and other food products, has a modest yield but durable dividend growth prospects.

It yields just 1.5%, but it is also a member of the S&P 500 Dividend Aristocrats, having raised its payout for 33 consecutive years.

Late last year, McCormick’s board declared a quarterly dividend of 57 cents a share, up from 52 cents, a boost of nearly 10%.

“The trend is toward organic, natural, and healthy,” notes Paul Hogan, portfolio co-manager of the FAM Equity-Income fund (FAMEX), who views the company as well- positioned. “All of those foods, when cooked, do require spices to give some zip to the flavor. McCormick is really in the sweet spot there.”

And its stock has been on a torrid pace, up about 50% in the past 12 months.

The company has been growing with the help of acquisitions. That includes last year’s $4.2 billion purchase of Reckitt Benckiser’s food unit, whose portfolio includes French’s mustard. That added to McCormick’s long-term debt, recently at a little more than $4 billion.

The company’s chief financial officer, Michael Smith, said at an investing conference in February that it is “focused on using our strong cash flow to pay down our debt and grow our dividend.”

The company’s strong free cash flow should support that.

Microsoft (MSFT)

Microsoft yields only 1.5%, but it has been steadily raising its quarterly dividend—most recently last fall, to 46 cents a share from 42 cents.

The company boasts a triple-A credit rating, and its gross margins are above 60%. “When you have a company that can produce those types of margins, typically you are going to see that flow through to cash flow,” says Barclay of Columbia Threadneedle.

In Microsoft’s fiscal third quarter, which ended in March, operating cash flow rose by 11% year over year, to $13.5 billion.

The stock has appreciated in recent years under CEO Satya Nadella, with a five-year annual return of 29%.

The company’s software suite, including Office 365, and Azure, a cloud-computing service, have helped drive growth.

The stock isn’t that cheap, trading at 25 times what it’s expected to earn over the next 12 months, FactSet says.

Still, Barclay says, “We believe the cash flows will grow in the next 12 months, and we still think there’s a lot of value in Microsoft.”

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