Blue-Chip Income Stocks to Buy: With the market down and a possible recession looming, now is a good time to begin looking for deals on stable, income-producing stocks.
Dividing-paying stocks are historically more reliable than other assets during downturns and also offer some protection against inflation.
In many cases, well-established companies that provide essential or everyday goods are the best choices for investment income in difficult economic times. Here are two blue-chip income stocks to consider adding to your portfolio while the market remains volatile.
Fast-food restaurant giant McDonald’s (NYSE:MCD) has been a powerhouse for income investors for years. Thanks to its massive international presence, popular menu and deep market penetration among consumers, McDonald’s has shown itself to be capable of producing stable, steady returns over the long haul.
McDonald’s pays an annual dividend of $5.52 per share, currently giving it a 2.01 percent yield. This distribution has been raised annually for 45 consecutive years, and the relatively stable payout ratio of just under 70 percent suggests that the trend of increases can continue.
Of particular note for income investors is McDonald’s strong dividend growth rate. Over the last 10 years, management has increased the stock’s distribution at a compounded annual rate of about 7 percent. With such a strong focus on dividend increases, income investors can earn higher yields on cost at a relatively fast pace.
McDonald’s also has the advantage of being a relatively safe stock to own during periods of high inflation. The company’s virtually unassailable economic moat gives it a high degree of pricing power. This ability to pass prices on to consumers has already served McDonald’s well in 2021 and 2022, allowing it to avoid significant hits to its earnings.
This exceptional pricing power pairs well with McDonald’s carefully managed margins. The company maintains an adjusted operating margin of 44 percent, considerably higher than most of its major competitors.
As long as management can maintain a respectable rate of revenue growth along with such high margins, it seems likely that McDonald’s will have room to continue its trend of steady growth.
A final point in McDonald’s favor is its high level of free cash flow. In 2021, the company generated over $7 billion in FCF. This was a substantial increase over both 2020 and 2019, the last pre-pandemic business year.
Even with the economic challenges of 2020, however, McDonald’s generated about $4.65 billion in FCF.
On the risk side of the equation, McDonald’s doesn’t appear to be a spectacular value at its current price. The stock trades at about 28 times its earnings and over eight times its sales. While not terribly out of line with the market as a whole, McDonald’s P/E ratio is quite high for a company whose projected growth rate over the next five years is just 7 percent. As a largely mature company, McDonald’s would have to be priced lower to be considered a true value stock.
Even with its somewhat high valuation taken into account, though, McDonald’s is still quite attractive for income investors. The company is a safe, stable dividend producer that can clearly ride out difficult economic times. Barring disruptions to the company’s trajectory, it seems likely that McDonald’s dividend will only continue to grow and reward shareholders with generous future incomes.
Coffee seller Starbucks (NASDAQ:SBUX) is another blue-chip income stock investors may want to consider in today’s market.
As an everyday staple for millions of consumers, Starbucks is well-positioned to ride out both inflation and a possible recession.
While consumers may adjust their purchasing behaviors to some extent, coffee will likely remain a daily purchase that most consumers will be unwilling to eliminate.
Starbucks pays out $1.96 per share annually, giving the stock a 2.25 percent yield. At just over 55 percent, though, Starbucks does maintain a somewhat lower dividend payout ratio than McDonald’s. Due to being a younger company, Starbucks only has an 11-year history of dividend increases.
Over the last 10 years, the company has increased its dividend at an annualized rate of over 19 percent, making it one of the strongest blue-chip dividend growth stocks of the last decade.
Like McDonald’s, Starbucks enjoys a great deal of power to set prices. The company has raised its prices in response to inflation several times since October of 2021. While earnings are still down from last year, these price increases have been instrumental in keeping the company’s bottom line in good shape.
Q2’s earnings, for instance, were reported at $0.84 per share, down from $1.01 in 2021. Without its ability to raise prices with minimal consumer pushback, Starbucks would almost certainly have seen a much larger drop in quarterly earnings as inflation rose.
Starbucks has also been extremely successful in growing its business through multiple ordering options. Drive-through, online orders and delivery orders made up an astonishing 72 percent of all Q2 revenue. Building consumer engagement through multiple channels has proven to be an effective way of generating ongoing growth.
One area in which Starbucks is slightly more attractive than McDonald’s is its probable returns over the next year. While analysts expect McDonald’s to notch respectable single-digit gains, the 12-month price forecast for Starbucks is 10.8 percent higher than its current price.
Analysts expect the stock to rise to $96.50 over the coming year. Encouragingly, even the most bearish analyst price target would only put the stock down by 0.1 percent. As such, Starbucks could be a good choice for investors looking for both growth and income.
While Starbucks is a relatively safe stock to own, it does carry some risks. Chief among these is a growing trend of unionizations in its restaurants which has both raised labor costs and created the potential for negative consumer perceptions of the company.
Starbucks is also still feeling the pressure of higher commodity prices and pandemic-era supply chain disruptions, both of which could weigh on its performance for some time to come.
Like McDonald’s, Starbucks is a company that seems to be in a good position to continue raising its dividend in the years to come. With both of these stocks trading below their previous highs, now may be a good time to add one or both of them to your portfolio.
As with most income investments, both of these stocks are likely best viewed as long-term buy-and-hold assets. Provided the companies are able to maintain their runs of dividend increases, investors who buy now could see strong yields on their cost basis as the stocks’ distributions grow steadily larger.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.