This pandemic has presented the global economy with an unprecedented challenge. The level of globalization, ease of travel from one country to another and the ensuing shutdowns contributed to the sharpest economic decline the developed world has ever seen. These conditions also made for unprecedented volatility in the stock market, sending even high-quality dividend stocks tumbling as investors panicked in the face of enormous uncertainty.
Many stocks have recovered, however, in the year since the Covid-19 crisis broke.
Now, I believe that these three stocks in particular are well-positioned to benefit from a continued economic recovery in 2021. Even better, they all pay dividends and have higher yields than the broader market.
Finally, all of these dividend stocks are also popular holdings for some of the world’s most influential institutional investors. For example, these picks are all held in the Bill Gates Foundation’s portfolio. All told, these names have safe payouts and will benefit greatly from the recovery coming in 2021 and beyond.
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Our first stock is UPS, a company that has built itself for over 110 years as a global behemoth in logistics, including ocean freight, ground freight, air freight and other related supply-chain services. Right now, the company trades with a market capitalization of $139 billion and is projected to generate about $87.5 billion in annual revenue this year.
UPS will be a major beneficiary of the incoming economic recovery. Why? Because its services are directly tied to economic strength. After all, a strong economy means goods need to be moved around. The same is true for when the economy weakens — demand for UPS’s services declines significantly. However, with the economy now undoing the damage of 2020, UPS stock stands to gain.
Even in 2020, however — a terrible year for the world’s economy — UPS still managed to generate record sales and adjusted earnings-per-share (EPS). In addition to that, it maintains a safe dividend. UPS has experienced 21 years of dividend growth, according to Seeking Alpha. In short, the company has nice income-paying staying power, a critical piece when trying to find high-quality dividend stocks.
Finally, UPS stock’s payout ratio is less than half of projected earnings for this year, with the dividend just 45.8% of projected earnings for 2021. That means that there’s sufficient room to continue growing payout in the coming years. It also means that, even under in extremely adverse scenario, UPS can continue to pay shareholders.
Caterpillar is a heavy-equipment manufacturer that is thoroughly involved in global construction and mining markets. Right now, CAT stock trades with a market cap of $117.6 billion. It should produce about $46.3 billion in revenue in 2021.
Of course, as a major industrial manufacturer with customers in multiple industries, CAT is highly leveraged to economic growth. In particular, mining and construction are two of the most cyclical sectors of the economy, making CAT a major beneficiary in 2021.
Plus, construction universally tends to rely upon perceived economic strength from developers. After all, if the economy is weak, construction investment tends to be lighter. Inversely, if the economy is booming, developers will spend more on new projects. So, we should see more upside ahead.
Given that CAT is leveraged to such a cyclical market, it’s also extraordinary that the company has been able to raise its dividend for 26 consecutive years. That period has included two harsh recessions, including the financial crisis of 2008. So, Caterpillar’s ability to raise its dividend each year — even during downturns — makes it a critical entry among dividend stocks. Unsurprisingly, CAT is also on the Dividend Aristocrats list, a group in the S&P 500 with 25-plus consecutive years of dividend growth.
Altogether, this is a shareholder-friendly company committed to returning cash to its investors. Caterpillar remained profitable in 2020, which allowed it to return “$3.4 billion to shareholders through dividends and share repurchases.”
Finally, CAT stock’s dividend is only about 50% of projected earnings. That means there’s ample room for a decline in earnings without undue stress on the dividend. There is also room to continue raising the payout in the future. With strong forecasted earnings growth in the coming years, I see Caterpillar’s dividend as very safe.
The final name on this list of dividend stocks is far less cyclical than the first two. However, it definitely stands to benefit from an economic recovery, too.
Waste Management is the largest waste management company in North America. It provides a full suite of waste disposal services, recycling services and a variety of eco-friendly initiatives, like gas-to-energy landfills.
WM stock currently has a market cap of $48.3 billion and it should generate about $16.8 billion in revenue this year. In fact, the company’s operations are surprisingly profitable — more than one might think for such a “boring” industry. Right now, it’s net income margin currently sits at a healthy 9.83%.
Of course, 2020 was a difficult year for the broader economy and WM was not immune. Revenue was flat, while adjusted EPS fell 8.9% for the year. Still, though, the company remained highly profitable, continuing to return cash to shareholders.
Waste Management stands to benefit from an economic recovery because those conditions tend to generate more waste than if the economy were stagnant or contracting. One example would be construction debris — if the economy is weak, construction activity slows and there’s less waste. The opposite is true during times of expansion. To be clear, WM is far less cyclical than UPS or CAT, but it still stands to gain from a recovery in this way.
Finally, though, WM stock’s dividend looks very safe, with a payout ratio of just 48.7%. That means that the company’s 15-year-plus streak of dividend increases is almost certain to continue. Additionally, should conditions deteriorate and earnings decline, Waste Management should still have no issue paying — and even raising — its dividend.
On the date of publication, Bob Ciura held a long position in UPS.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.
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