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3 Defensive Stock Buys that Pay Dividends

Saturday, August 8, 2020 | Sean Sechler
3 Defensive Stock Buys that Pay Dividends

With so many growth stocks seemingly overbought and the market trading close to all-time highs, now might be the perfect time to consider adding some defensive stocks to your portfolio. The benefit of buying a defensive stock is that it will be able to provide you with stable earnings and reliable dividends even when the market is experiencing volatility. This is why they are often considered to be “lower-risk” investments. With an uncertain economy and tons of companies trading at nosebleed valuations, there are several great defensive stocks that offer an attractive entry point at this time.

Instead of waiting for a big downturn in the market to buy defensive stocks, the smartest investors buy them when things are looking extremely bullish. That way, they are able to add lower risk businesses that are unaffected by business cycles. Although defensive stocks might not provide gargantuan returns during the height of a bull market, you will be glad to have them in your account when a downturn in the market occurs and high beta stocks get hammered.

Let’s take a look at 3 defensive stock buys that pay dividends below.

Northrop Grumman Corporation (NYSE:NOC)

The great thing about buying defensive stocks is that you know they will be able to generate solid cash flows and provide dividend payouts regardless of what the economy is doing. Northrop Grumman is the perfect example since it currently has over $70 billion dollars of order backlog on its books and offers a solid dividend yield of 1.78%. The aerospace & defense company generates the majority of its revenue from government contracts including agencies with deep pockets like the U.S. Department of Defense. One could argue that means Northrop Grumman stock offers stability during recessions.

The company’s Q2 numbers were solid, as it reported a year-over-year EPS increase of 19% to $6.01 per share. Perhaps the most impressive thing to mention about the company’s Q2 results was the 53% year-over-year increase in Free Cash Flow to $2.1 billion. Northrop Grumman also raised its 2020 guidance, which is another sign of strength in an uncertain economy. This might be one of the best defensive stocks to buy at this time and it’s quite likely that you can bank on continued dividend growth for years to come.

American Water Works (NYSE:AWK)

Another sector with solid potential at this time that is considered to be defensive is the utility sector. Conservative investors should absolutely take a look at American Water Works, a company that is the biggest and most diverse water utility company in the country. It sells water and wastewater services to residential, commercial, and industrial customers which is definitely a recession-proof business model. A big part of this company’s long-term strategy is to use its strong cash position to acquire smaller water companies and municipal systems as their infrastructure deteriorates. As American Water Works continues spending on investment and growth, it’s a stock that offers earnings growth potential with relatively low risk.

This stock is also a solid pick thanks to its strong fundamentals, consistent dividend growth, and strong Q2 earnings results. The company beat analyst estimates and was able to grow EPS to $0.97 per share, which was a year-over-year increase of 3.53%. American Water Works offers a 1.47% dividend yield and is actually one of the three highest-rated utility companies by credit rating agency S&P Global (NYSE:SPGI). It’s a great defensive stock pick since people will always need water utility services.

United Parcel Service, Inc. (NYSE:UPS)

You are likely familiar with this global package delivery giant which is instantly recognizable when you see one of its brown trucks on the street. It’s another top defensive stock to consider buying right now and is actually breaking out to all-time highs after it reported strong Q2 earnings driven by increased consumer demand. Q2 revenue increased by 13.4% year-over-year while Q2 Net Income grew 8.8% year-over-year, which are both impressive figures for a defensive stock. There’s a good chance that UPS has room to continue running higher this year thanks to the continued need for residential package delivery and pandemic related healthcare shipments.

UPS has a strong dividend yield of 2.78% and offers investors industry-leading operating margins. It also has a great balance sheet and has been steadily growing its dividend payouts for years. There’s also the idea that if the e-commerce boom continues, this company should experience healthy long-term growth tailwinds as a result. UPS saw its consolidated average daily volume surge to a record 20.9% growth in Q2 as it delivered 21.1 million packages per day. There’s no reason to think that this trend will slow down, which makes UPS a defensive stock with great upside potential.

Companies Mentioned in This Article

CompanyBeat the Market™ RankCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Northrop Grumman (NOC)2.2$324.72-1.0%1.79%22.84Buy$398.67
American Water Works (AWK)1.8$140.66+1.9%1.56%39.96Hold$136.92
United Parcel Service (UPS)1.7$160.41-0.7%2.52%31.89Hold$135.05
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20 Stocks Wall Street Analysts Love the Most

Every trading day, between 500 and 800 new recommendations and research reports are issued by sell-side equities research analysts. There are between 300 and 500 brokerages and research houses that issue ratings, price targets and recommendations and more than 5,000 securities around the world that regularly receive coverage from research analysts.

MarketBeat has tracked more than 170,000 distinct analyst recommendations in the last 12 months alone. Given the volume of ratings changes that occur each day, it can be difficult to sift through the noise.

Analysts don't always get their "buy" ratings right, but it's worth taking a hard look when more than a dozen different analysts from different brokerages and research firm are giving "strong buy" and "buy" ratings to the same stock.

This slide show lists the 20 companies that have the highest average analyst recommendations from Wall Street's equities research analysts over the last 12 months.

View the "20 Stocks Wall Street Analysts Love the Most".

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