3 DIVIDEND STOCKS THAT MIGHT BE SAFER THAN TREASURY BONDS, PART II

With the United States currently experiencing a hurricane of instability, investors are starting to question everything, even the wisdom of relying on US Treasury Bonds. In part one of this post, we identified the causes of this current uncertainty, and we identified the characteristics we would be looking for in a company that is so stable, that its stock might even be more reliable than US Treasuries. Here we discuss three names that make the grade. 

By the Sick Economist 

Essential Utilities, Inc. ($WTRG) 

The name of the company says it all. When the chips are down, and economic malaise has everyone cutting back to the bare essentials, an investment in a company named “Essential Utilities” can really shine. 

Essential is a major provider of drinking water and home gas heating across several Mid Atlantic and Mid Western states. They have millions of clients. During an economic crisis, millions of middle class people might very well cut back on vacations, eschew designer handbags, and even go years without upgrading to the latest iPhone model. But they are unlikely to attempt to go without clean drinking water or gas to heat their homes in the winter. 

Essential has weathered many economic downturns in the past. In fact, the company has paid a dividend for 80 consecutive years, often managing to grow that dividend at a rate significantly exceeding inflation (the dividend hike for the year 2024 was 6%.)

The result? A dividend that has grown 30% since the Covid Crisis of 2020. This demonstrates that the company has successfully kept up with inflation in the past, and it can very likely meet or exceed whatever inflation may await us as tariffs drive prices higher all over our economy. 

The company has modest debt that is well under control. Essential has roughly $7.4 billion in total debt, versus about $18 billion in total assets. And most of this debt is locked in at modest interest rates over very long periods of time. (The vast majority is fixed at interest rates between 3 and 5%, with maturities stretched out as far as 2050). 

The bottom line is, people are unlikely to be living without water. And a dominant, long established utility like Essential will be able to just raise their water prices in line with inflation. If inflation goes up, their prices go up, although their long term costs are locked in. This should lead to stable and growing annual payouts, which may seem more appealing than Treasury debt currently being issued by a broke federal government that seems to make decisions based on the cycles of the moon or whatever their tarot cards read this week. 

Ross Stores ($ROST) 

Ross Stores is an example of a company that might not only survive a recession, but rather, thrive in a recession. Ross is a countercyclical business meaning it may actually do better when times are tough. 

Ross gets most of its clothing inventory by purchasing the leftover clothing and forgotten inventory of major big brand retailers. In that sense, when the full price prestige brand retailers are hurting, Ross is actually doing better! A recession that results in major branded clothing not selling at full price, will actually mean that more and better inventory will float to the bottom of the retail ecosystem…Ross will buy the unsold inventory for cheap, and sell it to their loyal discount shoppers at a low price. 

Although almost every shred of clothing in the United States today was imported from now heavily tariffed countries, no one major retailer will have an obvious advantage over others. In other words, in a world where most major clothing importers are going to face tariffs one way or another, Ross is still equipped to sell for less than mainstream competitors. 

Additionally, Ross stands to gain lots of new customers during hard times. People who formerly would have bought more luxury clothing in the mall or online, will now be forced to give Ross a shot. Ross’s tremendous growth over the last decade indicates that many new clients who feel economically compelled to downgrade to Ross, will actually like what they find and become Ross Dress for Less clients for life. 

Ross is also very well equipped financially to survive a downturn. The company carries only $1.4 billion in debt versus a whopping $14 billion in assets. Additionally, their current dividend payout rate is only 23%, meaning that only 23% of profits get paid out as a dividend. Even if profits temporarily wilted, Ross has the financial wherewithal to outlast more flimsy competitors. 

Lastly, everybody remembers the three important rules or Real Estate….location, location, and location. Ross has big growth plans. They currently boast 2,205 stores across 44 states, and they plan to grow to 2900 stores over the coming years. If other, less solid retailers should stumble during a recession or stagflationary environment, that opens up more prime real estate for Ross to occupy.  

No matter how bad things get, people will always wear some kind of clothing. If we think that millions of middle class families could suddenly come under intense economic pressure, it’s a reliable bet to think they will want to buy that clothing at the lowest possible prices. Ross will be there to help out people in a jam. 

GE Healthcare ($GEHC) 

Just as the water you drink and the clothes that cover your body are basics, even under tough circumstances, medical imaging is an essential element of our modern healthcare system, unlikely to disappear as long as unwell patients are being wheeled into hospitals. 

GE Healthcare’s share price has really been hit hard in the early innings of this trade war, due to fears that GE may be cut off from the rare earths that are used in the manufacturing of the vast array of imaging devices that they sell to major healthcare providers around the world. 

While it’s true that GE may run into temporary setbacks and challenges, sooner or later, GE will secure an adequate supply of rare earths to continue cranking out new imagining machines. The reason is simple: modern medicine cannot exist without MRIs, PET Scans, Ultrasound exams, etc. etc. A recent study found that the use of the CT scan has gone up by 35% over the last ten years, while the MRI scanning has increased by 56%. Asking a doctor today to work without medical imaging is like asking her to perform surgery without anesthesia. GE will find the necessary rare earths somewhere, sooner or later. 

If the material squeeze caused by the trade war lasts, GE will just wind up charging higher prices. The firm is capable of charging higher prices because few companies have the deep pockets, decades of expertise, and hospital contacts to compete in this space. And with 10,000 Baby Boomers per day filing for their medicare card, the urgent need for these basic medical tools will continue to rise. 

Even if GE faces short term pressure, the firm is ready to power through. The company carries just $7.5 billion in long term debt versus $33 billion in assets. This is a a newly independent company, recently spun off from a larger GE conglomerate; as such the firm’s current dividend is very modest, less than a 1% dividend yield, the total cash payout amounting to less than 5% of annual profits. This means little strain in the short term while any trade war induced shortages get worked out, but juicy long term potential growth for a dividend that is starting out from a tiny base. Paying out less than 5% of net profits as dividend means that GE could easily triple or quadruple its dividend in the coming years, once the market has stabilized. This would be an easy way for GE investors to crush inflation. This long term growth potential remains even if revenue only grows sluggishly in the near term. 

Unusual times call for unusual action plans. We’ve rarely seen a financial crisis directly caused by our own Federal Government. But it certainly looks like we may be about to experience our first artificial financial meltdown. In this context, Treasury Bonds, the traditional safe haven of the cautious investor, just look like the folly of a heavily indebted government with poor decision making skills and a tendency toward erratic behavior. It’s very possible that the three companies above will provide a more steady, more inflation resistant alternative as we enter the hurricane…..