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3 Dividend Stocks That Thrive in Bear Markets

If you're looking to outsmart bears the next time they come knocking, you might want to consider adding PepsiCo (NYSE: PEP), Gilead Sciences (NASDAQ: GILD), and Colgate-Palmolive (NYSE: CL) to your portfolio. All three of these stocks offer reasons why they can outperform the market during a market crash, and each pays a healthy dividend yield that makes them perfect for income-oriented investors.

Let this stock satisfy your thirst

Dan Caplinger (PepsiCo): The best stocks for bear markets are those that don't see dramatic drops in demand for their products and can count on continued customer loyalty. PepsiCo fits that bill, with millions of customers seeking out its many beverage options, which include Aquafina water, Tropicana juices, and Rockstar energy drinks along with its namesake cola products. In addition, PepsiCo has an extensive food and snack business with its Frito-Lay and Quaker Oats businesses.

Image source: Getty Images.

PepsiCo tends to move in the same direction as the overall market, but not to as great an extent or with as much volatility as the typical stock. In recent years, the company has had a beta value of 0.70, suggesting about 70% as much risk as the market as a whole. That's consistent with how PepsiCo performed during the bear market year of 2008, falling about 26% when the overall market was down 37%. Meanwhile, PepsiCo has participated in the bull market as well, more than doubling from its bear market lows while paying lucrative dividends along the way.

PepsiCo has come through many down periods for the stock market and has been an innovator in the food and beverage industry. With that track record, PepsiCo will find ways to thrive even in the next bear market.

Beat the bear by looking in the bargain bin

Todd Campbell (Gilead Sciences): One way to protect yourself in a bear market is to include stocks in your portfolio that are inelastic to economic whims. Medicine, for example, is a necessity; and that makes drug stocks more insulated against downturns than other stocks. Buying drug makers when they're trading at bargain basement prices can be even more portfolio-friendly, and in my opinion, that makes Gilead Sciences a top pick for income investors.

Gilead Sciences is a biotech behemoth that's best known for dominating the hepatitis C market. The company reshaped hepatitis C treatment in 2014 when it began launching drugs that deliver functional cure rates of over 90% in as little as eight weeks. Gilead Sciences has gone on to become the market-share-leading maker of hepatitis C medicine, racking up billions of dollars per year in the process.

Hepatitis C isn't the only indication that Gilead Sciences dominates, either. It's also the market-share leader in HIV treatment. Its HIV drugs are staples in HIV standard of care, and as a result, the company's generating more than $10 billion in HIV-related drug revenue annually.

Gilead Sciences shares, however, have fallen on tough times as competition in these indications has heated up. New drugs that are shoehorning in on its dominance in hepatitis C, for example, have caused sales to stutter in the past year.

Nevertheless, I believe that the current share price reflects a lot of the competitive risk facing Gilead Sciences, and arguably, they don't accurately reflect the value of Gilead Sciences' bullet-proof balance sheet, rising dividend payout, and R&D pipeline. With shares trading at a trailing P/E ratio below eight -- a decade low -- and a dividend yield of 2.8%, I think this stock is a bargain worth buying.

Don't forget your toothbrush

Demitri Kalogeropoulos (Colgate Palmolive): Even during dramatic economic downturns, people just don't make changes to their tooth-brushing habits in a bid to save cash. That much is clear from Colgate's results, which were marked by rising profits and sales in the challenging global economy of 2009 and 2010. In fact, the consumer staples giant enjoyed a 22% spike in operating profit in 2009 as rising volume and lower costs more than offset a slight dip in selling prices.

Colgate is the market leader in toothpaste today, responsible for an incredible 44% of global sales. That dominant position delivers enviable pricing power along with market-leading financial gains. Gross margin hit a five-year high of 60% of sales last year as organic sales rose a healthy 4%. At the same time, cost cuts helped push operating profit to 25% of sales for an almost 8-percentage-point boost over the prior year to mark a new record for the company.

Data source: Ycharts.

That said, 2017 is shaping up to be an unusually weak year for the business. After reporting less than 1% organic sales growth, management warned in April that Colgate would be coming up shy of its goal of between 4% and 7% annual sales gains this year. Yet the company has been through many rough operating environments like this before and has sailed through them without needing to cut, or even pause, dividend growth. In fact, Colgate's payout has increased in each of the last 55 straight years. The next bear market isn't likely to break a streak like that. 

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Dan Caplinger has no position in any stocks mentioned. Demitrios Kalogeropoulos has no position in any stocks mentioned. Todd Campbell owns shares of Gilead Sciences. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Gilead Sciences and PepsiCo. The Motley Fool has the following options: short August 2017 $75 calls on Gilead Sciences. The Motley Fool has a disclosure policy.