The main purpose of investing is to help you to achieve your retirement goals, whatever they may be.
As the saying goes, many roads lead to Rome.
In investing, there are also different methods for attaining your investment objectives, be it investing in growth stocks or parking your money in dividend-paying stocks.
But when it comes to braving economic storms, dividend stocks are still a better choice.
Investors who gun for capital gains could see share prices stumble when economic conditions worsen.
Dividends, however, represent a tangible return on your investment as it is money that goes directly into your pocket.
Here are some reasons why dividend stocks are suitable to carry you through a possible recession.
A solid balance sheet
A common characteristic of dependable dividend companies is the presence of a strong balance sheet.
Just like a tree with strong roots can withstand a storm, a business with a robust balance sheet can get through an economic downturn unscathed.
Take VICOM Ltd (SGX: WJP) as an example.
The vehicle test and inspection company boasted a clean balance sheet with S$65.7 million in cash with no debt as of 30 June 2022.
VICOM grew its 2022’s first half (1H2022) net profit by 9.2% year on year to S$13.1 million and upped its interim dividend by a similar quantum to S$0.0332 per share.
It’s the same case for Haw Par Corporation Limited (SGX: H02).
The owner of the famous Tiger Balm brand sported a balance sheet laden with cash of S$600 million with a debt of just S$12.9 million as of 30 June 2022.
Moreover, its balance sheet was also fortified with S$2.5 billion worth of long-term investments in both United Overseas Bank Ltd (SGX: U11) and UOL Group Limited (SGX: U14), providing it with even more buffer against a downturn.
Cash is the lifeblood of all businesses
Another characteristic of many dividend companies is their ability to churn out consistent free cash flow.
Cash, rather than profits, is the lifeblood of all businesses.
With free cash flow, a business has more options as to how to deploy its cash to maximise shareholder value.
It can either buy back its shares, reinvest the cash to grow the business, or pay out a dividend to reward shareholders.
HRNetGroup Ltd (SGX: CHZ), a human resource staffing firm, generated free cash flow every single year since 2014.
Meanwhile, the company has also paid out a dividend since 2017 and even declared a special dividend of S$0.01 per share early this year.
Raffles Medical Group (SGX: BSL) has also churned out free cash flow every single year since 2010.
Over this period, the integrated healthcare provider has more than doubled its dividend to S$0.025.
Reputable brand names
A long history of increasing dividends is also emblematic of a business with a strong reputation and/or brand.
For examples of such businesses, we turn to established multinational companies that are listed in the US.
Kimberly-Clark (NYSE: KMB) is a consumer goods giant whose brands such as Kleenex and Scott are sold in more than 175 countries and has sales of US$19.4 billion for 2021.
The company has raised its annual dividend for 50 consecutive years to US$4.64 per share.
Similarly, Procter and Gamble (NYSE: PG) has also increased its dividend without fail for 66 years and boasts recognisable brands such as Pantene, Gillette, Oral-B and Head & Shoulders.
Fast-food giant McDonald’s (NYSE: MCD) pays out a quarterly dividend of US$1.38 per share, representing its 45th consecutive year of increase.
Get Smart: Choosing the right businesses
Dividend-paying companies have attractive characteristics that enable them to sail through tough times.
That said, as investors, we also need to remain vigilant and watch for potential value traps.
The key is to avoid companies that cannot sustain their dividend payments as they lack a strong competitive moat.
If the selection is done well, then you can sleep peacefully at night knowing that your investments will continue to supply you with a reliable stream of passive income.
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Disclaimer: Royston Yang owns shares of VICOM and Raffles Medical Group.