The stock market is riskier than bonds, a high-yield savings account, or just keeping your money in cash. But it's important to understand that some stocks are far safer than others (although never risk-free).
When searching for safe stocks, some characteristics to consider are the company's industry and whether it has a business model and balance sheet that can hold up well during an economic downturn. Another factor is the company's runway for future earnings growth, which can support a growing dividend over time.
Coca-Cola(NYSE: KO), Clorox (NYSE: CLX), and Southern Company(NYSE: SO) have three recession-resistant business models and decades of dividend increases. Investing in equal parts of each stock produces an average dividend yield of 3% -- which is well above the S&P 500 index average dividend yield of 1.3%. Putting $900 into each stock should produce over $80 in passive income per year. Better yet, the passive income stream should grow if these companies continue to increase their payouts. Here's why all three dividend stocks are worth buying now.
Image source: Getty Images.
An ultra-safe Dividend King
Coca-Cola is a textbook example of a safe stock. It is a Dividend King with 62 consecutive years of dividend raises. It has a geographically diversified business with a variety of products spanning all the big nonalcoholic beverage categories -- from soda to juice, tea, coffee, energy drinks, water, and sparkling water. Coke's diversification ensures that a slowdown in a given product or region won't derail the business.
Coke's greatest competitive advantage is its ability to develop and market a brand. Coke has the resources to take a brand to the next level by efficiently producing and distributing a product. Not every brand Coke develops or buys will be a smashing hit, but Coke has the wiggle room to take risks, make mistakes, and double down on a good idea.
Demand for Coke's products isn't as cyclical as demand for consumer discretionary categories like a new car or home improvement. This aspect makes Coke an ultra-safe stock even during a recession.
With a 2.8% dividend yield, Coke has the makings of a foundational holding for risk-averse investors looking to generate passive income or supplement income in retirement.
Clorox has rebounded but could still be worth buying and holding
Clorox stock was down big this past summer but has since staged an epic rally -- up over 20% in the last three months. But Clorox's fiscal 2024 results weren't great, and its outlook for fiscal 2025 is fairly weak as well -- calling for just a 3% to 5% increase in organic sales (excluding divestures). So investors may be wondering why Clorox has been such a hot stock as of late.
The simple reason for the jump may be due to expectations of where Clorox will be a few years from now rather than where it is today. The company has been on a cost-cutting spree, and its recent divestitures indicate that it is focusing on its strongest brands and geographic regions. Over time, this strategy should lead to higher margins. And already, Clorox's margins have begun to improve.
As you can see in the chart, Clorox is roughly the same price as it was five to seven years ago, but its operating margins are down big from the pre-pandemic range of around 18% to 20%. However, its revenue is higher.
CLX Revenue (TTM) data by YCharts
The glass-half-full approach to Clorox is that the company could be a good buy if it can continue improving margins. Clorox has an excellent portfolio of brands -- from its flagship cleaning products to Burt's Bees, Glad trash bags, Kingsford charcoal, Brita water filters, and more. It has also increased its dividend every year for 46 consecutive years and yields 3%.
Still, Clorox is on the pricey side, especially considering the company is showing signs of improvement but is still likely years away from returning to its pre-pandemic form. Therefore, you may want to monitor the company's turnaround -- notably how Clorox leverages its top brands across all of its core categories. If some categories begin to improve while others lag, it could be a sign of a deeper issue with a particular brand. For example, Clorox has been seeing lower sales in bags, wraps, and cat litter -- blaming competition for the slowdown. If Clorox can improve its weakest segments, it will be a good sign that the turnaround is nearly complete.
Southern Company can power your portfolio with a lifetime of passive income
Earlier this month, Southern Company hit an all-time high and surpassed $100 billion in market cap for the first time. The utility focuses on the Southeastern U.S. and makes money through traditional electric operating companies, natural gas distribution, and wind, solar, and natural gas power generation assets.
Southern Company is one of the few utilities that have embraced nuclear energy, opening a nuclear power plant in 2023 and another in 2024 under its subsidiary Georgia Power. Known as Vogtle 3 and Vogtle 4, they are the first newly constructed nuclear units built in over three decades. With all four units in operation, Plant Vogtle is the largest generator of clean energy in the nation, with an estimated 30 million MWh of electricity production per year.
For context, the U.S. generated 4.178 billion MWh of utility-scale electricity in 2023 -- 775 million MWh of which was nuclear. This means that Plant Vogtle contributes about 0.7% of U.S. utility-scale electricity.
Nuclear power has been gaining attention recently as big tech companies turn to nuclear as a potential energy source to power artificial intelligence. On Oct. 14, Google parent company Alphabet and Kairos Power signed a Master Plant Development Agreement for 500 MW of nuclear power projects by 2035.
By embracing nuclear, natural gas, solar, and wind energy, Southern Company has approached the energy transition in a balanced way that positions it well and gives it valuable experience bringing mega-scale nuclear projects to life.
With 23 consecutive years of dividend increases and a dividend yield of 3.2%, Southern Company stands out as a solid income stock and a utility that is allocating capital on worthwhile projects.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.
