Top dividend stocks to weather market volatility

Dividend stocks provide income and reduce portfolio volatility when markets become turbulent, hence why I’m looking at these stocks for my portfolio.

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Since the beginning of 2022, we have witnessed considerable volatility within the stock market. Many of the technology stocks cited as ‘the future’ have fallen considerably, especially in the renewable energy, cannabis, and buy-now-pay-later (BNPL) sectors. With this, many portfolios highly geared to such ‘growth stocks’ would have experienced substantial drawdowns. This further confirms the importance of diversification and buying dividend stocks, as these can give investors more assured income streams compared to highly volatile growth companies.

In addition to this volatility, investors today may favour companies with revenues now rather than far into the future, due to rising inflation and interest rates. We have witnessed this in real-time with the NASDAQ 100 (a proxy for technology stocks) officially entering a bear market (20% decline or greater) since its peak in November 2021. This could benefit the three companies mentioned below, in my opinion.

The first stock I may add to my portfolio is Shell, which should continue to benefit from a high oil price, as well as the transition to cleaner energy. Oil companies are under pressure by investors to be prudent with capital expenditure on new oil exploration, meaning a sustained higher oil price is likely. Since the market crash in March 2020, the oil price has risen over 300% and, although oil companies did cut their dividends following the crash, I believe this unlikely to happen again due to the huge energy expenditure needed to fuel the renewable energy transition (since all machinery, transportation, etc, still needs oil).

Lockheed Martin (NYSE: LMT) is a defensive company in every sense of the word. It makes fighter jets and other military weapons, as well as other combat machinery. The company has assured revenues because the majority of its business comes from government contracts. This allows it to pay a 2.6% dividend as it generates considerable free cash flow from the sale of its military equipment. Alongside this, the company has also been able to invest its profits into space exploration, a rapidly growing niche. This gives investors the benefit of assured revenue alongside an exciting growth aspect to Lockheed’s business at a reasonable 16x forward price-to-earnings ratio. The company should also benefit from increased defence spending by governments due to the Russia-Ukraine war.

Finally, Regeneron Pharmaceuticals (NASDAQ: REGN) and Bristol Myers Squibb are both extremely cheap, diversified ‘big pharma’ companies with strong free cash flow. Both companies’ share prices have remained strong during the market sell-off this year as investors seek defence in assets with more assured revenue streams. Regeneron has been under-appreciated by the market because of patent expiry for its Eylea drug, used to treat retinal diseases. Once drug patents run out, general pharmaceutical companies can recreate these drugs for a fraction of the price, rendering them worthless to the company that created them. Some of these patents don’t expire until 2030 and the company has a huge pipeline of potential drugs that could bring further revenue in the future. Both companies have recent momentum behind their share prices, and I see them as long-term holdings in my own portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter McMullan owns shares in Regeneron Pharmaceuticals, Bristol Myers Squibb and Lockheed Martin. The Motley Fool UK has recommended Lockheed Martin. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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