How to Recession-Proof Your Portfolio With These 5 Dividend Aristocrats

NEW YORK (TheStreet) -- "Dividend aristocrats" have historically performed well during recessions. The Standard & Poor's Dividend Aristocrats index was down only 21.88% in 2008. For comparison, the S&P 500 index was down 37% in the same period.

The Dividend Aristocrat index is made up of stocks with 25 or more years of consecutive dividend increases. Stocks with a long history of dividend increases tend to have strong, stable cash flows and a history that shows they can weather economic downturns.

Courtesy of S&P 500 Dividend Aristrcrats Fact Sheet

Dividend Aristocrats with Smallest Losses in 2007 to 2009 Recession

Not all Dividend Aristocrats are created equally. Some handle recessions much better than others. The 10 Dividend Aristocrats from 2007 with the lowest maximum drawdown (biggest loss from highest price to lowest price) from the beginning of 2007 to 2009 are shown below. The maximum drawdown and returns for the SPDR S&P 500 ETF Trust (SPY)  are shown as well for comparison.

McDonald's (MCD) had the lowest overall maximum drawdown, at -21.65%. McDonald's was also the only Dividend Aristocrat to post positive returns in 2007, 2008, and 2009. The company had the highest return on the top 10 in 2007 as well. The success of McDonald's in this exceptionally bearish market shows the company did not only survive during the last recession, it thrived.

Wal-Mart (WMT) had the second-lowest maximum drawdown through the period at just -26.19%. Like McDonald's, Walmart appeals to consumers who are budget-conscious. It is not surprising that Walmart performed very well during the 2007 to 2009 recession. Walmart's P/E ratio has decreased since the 2007. The company has a strong dividend yield, conservative payout ratio and solid historical earnings per share growth rate.  Walmart is ranked as a Top 10 stock based on the 8 Rules of Dividend Investing.

Looking back at what stocks performed best during the last recession shows what businesses have historically performed well during market downturns. What Dividend Aristocrat stocks today are most likely to increase earnings during the next recession? Businesses that are industry leaders who operate with a strong competitive advantage and have a long history of positive earnings.

Top 5 Recession Proof Dividend Aristocrats

  1. Wal-Mart
  2. McDonald's 
  3. Exxon Mobil (XOM)
  4. Becton Dickinson (BDX)
  5. Kimberly-Clark (KMB)

Wal-Mart

  • PE ratio 2007: 17.18
  • PE ratio now: 15.76

Wal-Mart is positioned just as well to handle a recession today as it was in 2007. The company has increased its store count and selling space since 2007. When a recession comes, people will continue to shop at Wal-Mart to take advantage of the discount retailers low prices.

McDonald's

  • PE ratio 2007: 14.39
  • PE ratio now: 18.42

McDonald's earnings per share increased each year from 2007 to 2009. The company experiences sales growth during recessions as consumers switch to lower priced restaurant options. McDonald's is among the cheapest restaurants, and benefits from the shift to cheap food during recessions.

Exxon Mobil

  • PE ratio 2007: 10.24
  • PE ratio now: 13.90

Exxon Mobil's earnings are minimally correlated with the boom/bust economic cycle.  The company's earnings are dependent on oil & gas prices and oil reserve discovery, not consumer discretionary spending. Exxon Mobil's limited exposure to economic climate makes it an excellent investment during bear markets.

Becton Dickinson

  • PE ratio 2007: 24.02
  • PE ratio now: 24.82

Becton, Dickinson manufacturers and markets medical, diagnostic, and bioscience products. The company performs well during recessions because medical products are in demand even during economic downturns. Becton, Dickinson sells its products primarily to health care providers and not consumers, minimizing its exposure to recessions.

Kimberly-Clark

  • PE ratio 2007: 18.67
  • PE ratio now: 20.00

Kimberly-Clark's top brands include Huggies, Kleenex, & Kotex. Recessions do not significantly have an impact on the operating performance of Kimberly-Clark because the company sells staple consumer products that are used at the same speed regardless of the economic climate.

At the time of publication the author had a position in WMT and MCD.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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TheStreet Ratings team rates MCDONALD'S CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate MCDONALD'S CORP (MCD) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, good cash flow from operations and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • MCD's revenue growth has slightly outpaced the industry average of 6.0%. Since the same quarter one year prior, revenues slightly increased by 1.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.86, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.28, which illustrates the ability to avoid short-term cash problems.
  • 43.68% is the gross profit margin for MCDONALD'S CORP which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 17.98% is above that of the industry average.
  • Net operating cash flow has increased to $1,907.30 million or 13.06% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -3.05%.
  • MCDONALD'S CORP' earnings per share from the most recent quarter came in slightly below the year earlier quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, MCDONALD'S CORP increased its bottom line by earning $5.56 versus $5.36 in the prior year. This year, the market expects an improvement in earnings ($5.76 versus $5.56).

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