Typically in times of uncertainty, investors flock to dividend stocks as they offer steady returns with lower risk. These stocks tend to have more resilient businesses that are able to withstand periods of economic turbulence.
Additionally, economic turbulence tends to come about with lower rates which increases the attractiveness of dividends.
However, 2022 had a unique mix of factors that negatively affected dividend stocks. We had an environment of slowing growth and rising rates which short-circuited the normal process that would lead to a bid in dividend stocks.
Yet, the situation is certainly improving in the early days of 2023 as longer-term rates are bending lower and even shorter-term rates are more range-bound than climbing higher. The market consensus is now that the Federal Reserve's rate hike cycle will be over following two 25 basis point hikes at its next 2 meetings. Possibly, the best indication of this outcome is that the 6-month Treasury is trading at 4.8%, while the 10-year Treasury is yielding 3.6%.
Amid this changing environment, here are 3 dividend stocks that investors should consider:
Lockheed Martin
Only a handful of stocks have seen their prospects substantially improve over the past year, defense stocks are in this category due to Russia's invasion of Ukraine and increased tensions between China and Taiwan. As a result, defense spending is going up all across the globe, and Lockheed is a producer of top weapons for defense.
For investors, Lockheed offers a solid 2.5% yield. It's also very reasonably priced with a P/E ratio of 17. Additionally if the economy does deteriorate and fall into a recession as many analysts believe, then defense stocks like LMT are well-positioned to outperform.
Vale
One perplexing development that is contrary to the recession narrative is Q4 GDP is coming in at 3%, the economy keeps adding jobs, and China's reopening is expected to deliver a major stimulus to the economy.
For investors, it would be a great opportunity to add materials stocks which have been crushed due to China and expectations of an imminent recession. Among these, Vale is one of the top dividend payers with an 8% yield and a massive balance sheet that will benefit from lower rates.
Dow Chemical
Chemical companies are another beneficiary of an acceleration in global growth. What's remarkable is that these stocks had a nearly 50% decline during the summer months as recession fears intensified, yet there was not such a dramatic decline in earnings, although earnings forecasts were reduced.
But, this may not come to fruition if global growth does accelerate. DOW offers investors a 5% dividend and is quite cheap with a P/E of 7. With its massive balance sheet and strong cash flow, the company should benefit from lower rates which should result in more dividend boosts and stock buybacks.
