The global economic crisis is pushing stock prices down. During these periods, dividend shares generally fare better than the broader market.
For example, Goldman Sachs recently conducted research where it found that three-quarters of the S&P 500’s 77% returns during the inflationary 1970’s was due to dividends and dividend reinvestment.
Furthermore, dividend-paying companies are significantly profitable, whereas unprofitable companies will be hit the most by economic instability. This is because profitable companies have room to withstand cost and inflationary pressures.
Passive income stocks: our picks
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With this in mind, let’s take a look at two dividend shares I’m buying more of.
AbbVie
AbbVie (NYSE: ABBV) is a pharmaceutical giant in the US originating due to a spin-off from Abbott Laboratories in 2013. It specialises in the research and production of innovative drugs.
AbbVie is also a dividend king with 50 years of consecutive pay-out raises. Over the last five years, dividends also increased by an incredible 120%. It also boasts a dividend yield of 4% compared to just 1.82% from the S&P 500 as a whole.
AbbVie is also very cheap, currently trading at a forward price-to-earnings (P/E) ratio of just 12.
However, AbbVie faces some stumbling blocks. Its top selling drug, Humira, is losing its patent next year, allowing competition to produce biosimilar drugs and eat away at the $17bn it brought AbbVie in 2021. This could severely affect its revenue growth.
I’m glad that AbbVie has therefore planned for this, with two potential replacements in its pipeline. Management has provided guidance of more than $15bn in expected sales of Rinvoq and Skyrizi, its new drugs, by 2025. I’m also confident AbbVie can continue its strong growth due to the growth prospects of its general pipeline.
With a projected dividend pay-out ratio of 41% in 2022, AbbVie should be more than able to continue supporting and growing its dividend.
US Bancorp
U.S. Bancorp (NYSE: USB) is the fifth largest bank in the US, focusing on traditional banking services, such as deposit growth and providing loans. Its rigorous nature in only providing high-quality loans helps it achieve an impressive return on equity. This gives it a competitive advantage over competitors.
It also has a dividend yield of 4.4% and 11 years of consecutive dividend hikes. With a pay-out ratio of 36%, it’s also able to support and raise its dividends. Plus, with a forward P/E ratio of just 8, U.S. Bancorp is ridiculously cheap right now.
Furthermore, due to higher interest rates, U.S. Bancorp is generating higher net interest income (NII). NII is the difference in revenue of a bank’s interest-bearing assets with the expenses arising from its interest-bearing liabilities. By increasing interest rates on its loans, NII and thus profit likewise increase.
However, when interest rates are high, consumers prioritise saving money rather than taking out loans. This could potentially push NII and thus profit down.
Now what
Inflation and interest rates are rising, which will affect many companies. However, AbbVie and U.S. Bancorp are very profitable, allowing them to better weather the current economic storm. Their low pay-out ratios mean they can also maintain and even grow their dividends. Both shares are also cheap and have strong growth prospects, which is why I’m buying more shares of these companies today.
