Three Dividend Stocks to Consider for a Defensive Market Strategy

As the stock market hovers near record highs, driven in part by an artificial intelligence (AI) bubble, investors may want to consider a defensive strategy. Focusing on blue-chip dividend stocks can help maintain market exposure while reducing risk. Chevron (NYSE: CVX), McDonald's (NYSE: MCD), and PepsiCo (NASDAQ: PEP) are three stocks highlighted for their above-average yields, dividend growth track records, and potential upside from company-specific catalysts.

Chevron currently offers a forward dividend yield of around 3.5%. The company is implementing a cost-cutting plan expected to boost cash flow by 10% annually through 2030. Management remains committed to paying down debt, returning capital to shareholders, and increasing dividends annually, a practice the company has maintained for nearly 40 years. In Q2, Chevron paid out $3.5 billion in dividends, repurchased over $3.1 billion in shares, and reduced outstanding debt by over $8 billion.

McDonald's has achieved Dividend King status with a 3.3% forward dividend yield. Despite this milestone, the stock has fallen out of favor due to weak domestic same-store sales growth. However, international sales remain strong, and analysts predict mid-single-digit earnings growth over the next two years. Trading at 18 times forward earnings, McDonald's could see a significant rebound if domestic sales improve.

PepsiCo is another Dividend King trading at a discount, with a forward dividend yield of nearly 4.7%. The company's valuation has dropped to 15 times forward earnings, below Coca-Cola's 25 times multiple. Despite concerns over its U.S. snack business, PepsiCo continues to show mid-single-digit earnings growth. Any improvement in investor sentiment could positively impact its share price.