In an investing climate in which the U.S. economy has officially entered a recession, volatility has returned to the stock market. While the S&P 500 Index is well off of its 2020 lows, investors may want to consider getting more defensive in their stock portfolios.

Specifically, we recommend income investors focus on high-quality dividend growth stocks such as the Dividend Aristocrats. These are a group of stocks in the S&P 500 Index that have each raised their dividends for 25 consecutive years or longer. PepsiCo (PEP) is a Dividend Aristocrat with a streak of 48 years of annual dividend increases.

The company’s long dividend history is thanks to PepsiCo’s impressive brand portfolio. PepsiCo has 23 individual brands that each generate $1 billion or more in annual sales. These high-quality brands provide the company with stable cash flow and steady growth each year, which in turn has allowed PepsiCo to reward shareholders with rising dividends.

Steady Results In A Challenging Environment

The coronavirus crisis that has brought the U.S. economy into recession is a severe challenge for companies across multiple industries. But PepsiCo has hardly skipped a beat this year. Stay-at-home orders in various cities across the U.S. led to consumers stockpiling food and beverages. This gave PepsiCo a meaningful boost in the first quarter.

In the most recent quarter, PepsiCo generated 10% growth in adjusted earnings-per-share compared with the same quarter last year. Organic revenue growth (which strips out currency fluctuations) increased 7.9% for the quarter, as PepsiCo benefited from pantry-stockpiling across the U.S.

Growth was broad-based, both in terms of product segment and geography. Food and snacks reported 5.5% organic growth, while the beverages portfolio generated 6% growth for the quarter. By geographic region, Latin America, Europe, and Africa, Middle East & Africa operating segments each posted 14% organic growth for the period.

PepsiCo handily exceeded analyst expectations in the first quarter, both in terms of revenue and adjusted EPS. It is highly likely that 2020 will be another year of growth for PepsiCo, which directly benefits shareholders in the form of continued dividend increases.

An Attractive Dividend Aristocrat For The Long Run

Long-term investors should consider Dividend Aristocrats such as PepsiCo, for their steady growth from year to year, even during recessions. PepsiCo has increased its dividend for 48 years in a row, a long period of time that has included multiple recessions. The company’s durable competitive advantages—specifically its leading brand portfolio and its global scale—have led to consistent dividend growth, regardless of the broader economic climate.

Today, PepsiCo stock offers a solid dividend yield of 3.1%. In an investing climate of historically low-interest rates, the S&P 500 Index has an average dividend yield of just ~2%. Therefore, PepsiCo’s 3.1% yield is significantly higher than the index average, while also providing shareholders with annual dividend increases.

Indeed, PepsiCo is a very shareholder-friendly company. Even though the U.S. economy officially entered a recession in February, the company continues to return excess cash to shareholders. Management guidance calls for total cash returns to shareholders of approximately $7.5 billion for 2020, consisting of dividends of $5.5 billion and share repurchases of $2 billion.

PepsiCo is not a deep-value stock; the 2020 price-to-earnings ratio is approximately 24x, based on average EPS estimates of $5.32 for the year. But high-quality companies like PepsiCo typically command higher valuation multiples, thanks to their extremely strong and consistent cash flow and dividends.

Final Thoughts

The investing environment is increasingly uncertain for income investors. With interest rates at historic lows and stock prices recovering meaningfully from their 2020 lows, investors should place a renewed focus on quality dividend stocks. Dividend Aristocrats like PepsiCo are even more attractive given the likelihood of a severe global recession. With a yield above 3% and a long runway for future growth, PepsiCo is an attractive stock to buy and hold for the long-term.