Over the past four years, investors have become very familiar with stock market volatility. Wild swings in the S&P 500 have been the norm as the index swung from bull to bear market and back again. We may be trending higher once more, but smart investors understand the next correction is always just over the horizon.
Warren Buffett has been a net seller of stocks over the past year. He’s built up a massive $157 billion war chest that he’ll be ready when the next bear market hits. The Oracle of Omaha loves to buy stocks of good businesses when they go on sale. You should be ready too.
One of the best ways to make money on Wall Street is to buy dividend stocks. Companies that share their success with investors tend to be profitable and have been tested over time through various market conditions. The fact that they come out stronger on the other side indicates they are the type of high-quality stocks you want to own.
It’s no coincidence dividend stocks also tend to outperform those that don’t pay a dividend. Looking at data going all the way back to 1930, Hartford Funds found there was not a single decade when dividend-payers on the S&P 500 did not generate positive returns. Non-income-generating stocks can’t say the same thing.
Because dividend stocks minimize the impact downturns have on your portfolio, the following three companies are income stocks you want to buy before the next bear market starts growling.
Altria (MO)
Tobacco giant Altria (NYSE:MO) is the first dividend stock to buy before the long winter of a downturn sets in. Its payout yields a mouth-watering 9% annually, and the stock has long been a lucrative income stream for investors.
Smoking is in a secular decline but Altria remains highly profitable due to the addictive nature of nicotine. The income stream it throws off tends to be reliable and stable. After acquiring electronic cigarette manufacturer NJOY, Altria has the potential to make a lasting mark on the industry’s smoke-free future.
NJOY is the third largest e-cig manufacturer behind British American Tobacco (NYSE:BTI) and one-time Altria investment vehicle Juul Labs. The e-cig maker is far behind its rivals, but with the marketing muscle of Altria behind it and the ability to use the top-selling Marlboro brand, NJOY should quickly gain ground.
But Altria is not a growth stock. Rather, it is a steady business that does well in downturns and boom times. Possessing significant pricing power, a loyal customer base and the potential to take market share in an emerging category means it deserves a place in your portfolio before the market correction happens.
Walgreens Boots Alliance (WBA)
It’s been a tough year for pharmacy chain Walgreens Boots Alliance (NASDAQ:WBA). The fading impact of COVID-19 on people’s daily lives is a significant headwind. Walgreens administered just 400,000 vaccinations in the third quarter versus 2.9 million in the same quarter of 2022.
Speaking of, the cold and flu season wasn’t as bad as expected either, with activity down 35% year over year. The company also got caught up in the opioid epidemic that snared many in the industry. Walgreens paid out a substantial settlement for its alleged role in the crisis. But these are all transient issues for the pharmacy.
What really dragged down Walgreens was the decision not to sell its U.K.-based Boots chain and beauty care company No7 Beauty. Investors wanted a more U.S.-focused healthcare company, and keeping the businesses indicated management would be distracted.
However, they are still top-performing businesses and Walgreens’ healthcare operations are also performing well. It acquired CareCentrix, while its VillageMD bought Summit Health. Segment sales rose overall as the acquired businesses turned in strong performances.
Walgreens’ dividend yields 9.3%, making it one of the highest-yielding Dividend Aristocrats. While some worry the dividend is not sustainable, the company said the payout is a high priority that it reviews annually. Healthcare is something you can’t turn off in a downturn. It means Walgreens is a dividend stock to buy now before a bear market hits.
International Business Machines (IBM)
International Business Machines (NYSE:IBM) is the third stock investors should be looking at ahead of a correction or crash. This is not your father’s slow-growth, computer company. Instead, IBM is a nimble, tech stock with a finger in all facets of tomorrow’s technology. It may not always be the first to market with innovation, but it is capable of spotting a trend and jumping on it.
It missed the transition to cloud computing but quickly made up for lost time. IBM now offers a full-stack cloud platform with over 170 products and services. They cover data, containers, artificial intelligence (AI), Internet of Things and even blockchain technology. IBM acquired Red Hat in 2019 and is using the open-source software leader to position itself as a hybrid cloud solutions provider.
IBM is also working on next-generation, heavy metal-free batteries for electric vehicles. More recently it began rolling out its watsonx AI and data platform. It offers a suite of integrated tools for working with generative AI capabilities.
The changes are having an impact. Revenue and margins are widening. The stock is up 33% from recent lows but only trades at a discounted 12 times the free cash flow it produces. With a dividend yielding 4.1% annually, Big Blue possesses downside protection as it builds up its high-growth opportunities. Both will serve it well in a bear market.
On the date of publication, Rich Duprey held a long position in MO and WBA stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.