With the ASX reaching new highs and stocks becoming more and more expensive each day, it's a good time to have a think about whether your dividend-paying companies that you may rely on for income have solid earnings bases that can withstand the good times as well as the bad (and even the ugly).
I believe that in these times, price is just as important a consideration as company quality, because, as Warren Buffett says, "it's only when the tide goes out that you learn who has been swimming naked."
Here are two ASX dividend-paying stocks that I think will still be reasonably clothed if and when the tide does turn.
Ramsay Health Care Limited (ASX: RHC)
I think Ramsay is both a wonderful company as well as a quality defensive stock – after all, we don't stop getting sick and still need the odd hospital stay when times get tough. Healthcare stocks like Ramsay are in an industry with perpetual tailwinds, and getting some exposure in your portfolio would be a good move (in my view).
Ramsay owns or operates more than 220 quality private hospitals across Australia, with a significant and growing presence in Europe and Asia as well. The company has also increased its dividend every year since 2000, making RHC a quality income share as well. Ramsay is yielding a dividend of 2.02% on current prices and you can reasonably expect a raise in the near future as well.
Coles Group Ltd (ASX: COL)
Coles remains attractive as a defensive income stock due to its network of supermarkets across the country all providing food and everyday essentials at very low prices – something that I don't expect a recession to dampen demand for. Coles has also impressed me with its plans to cut costs and implement supply-chain automation over the next few years, which should help the company stave off competition as well as keep a high payout ratio.
Speaking of payouts, Coles has yet to pay its first dividend, but the company has flagged that it intends to payout between 80–90% of earnings going forward, which means we are looking at a dividend yield around the 4–5% level (which also should be fully franked).
Foolish takeaway
With stocks priced where they are, it may not be possible to make an entry position in these two companies at a decent discount. However, both still offer compelling income stream that should be safe (in my view anyway) from the turbulence of tough economic times.