3 Extremely Safe High-Yielding Dividend Stocks to Buy If the U.S. Plunges into Recession
There is no doubt that this year has been difficult for investors. Since hitting their respective closing highs in the first week of January, the Dow Jones Industrial Average and S&P500 have fallen into corrective territory (i.e. they have fallen by at least 10%). Things are even worse for those dependent on growth Nasdaq Compoundwhich has lost nearly 30% of its value since hitting its all-time high in November.
This turbulence seems to be directly linked to growing fears of a recession in the United States. First quarter gross domestic product fell a startling 1.4%, and historically high inflation certainly appears to be negatively affecting low-income consumers, as evidenced by walmart‘sand Targetthe latest operating results.
Dividend stocks can be your golden ticket to wealth
However, when viewed with a broader lens, the latest corrections – including the Nasdaq bear market – are an opportunity for patient investors to pounce. Eventually, any noticeable declines in the market are completely erased by a bullish rally.
Arguably one of the smartest ways to make your money work during a recession is to buy dividend stocks. Companies that pay a dividend are often consistently profitable and have a proven track record in that they have been through recessions before.
Additionally, dividend-paying stocks have a rich history of outperforming their non-dividend paying counterparts. According to a report from JP Morgan Asset Management, a division of the nation’s largest bank by assets, JPMorgan Chasedividend-paying stocks averaged a 9.5% annual return between 1972 and 2012. In comparison, public companies that did not offer payouts averaged a meager 1.6% annual return over the same period .
Dividend stocks have the potential to cushion short-term declines, combat historically high inflation, and ultimately enrich patient investors over time.
The following are three extremely safe high-yielding dividend stocks that investors can buy if the United States plunges into recession.
AT&T: yield of 5.49%
The first exceptionally safe high-yield income stock to buy as recession fears mount is the telecommunications giant AT&T (T 0.94%). When adjusted for the company’s WarnerMedia spin-off, AT&T shares are actually upper for the year.
Even though the glory days of AT&T’s strong growth are long gone, the company has a number of catalysts capable of generating modest organic growth and slowly but surely driving its stock price higher.
For example, AT&T’s biggest catalyst is the 5G revolution. Over the next two years, it will invest billions of dollars in upgrading its wireless infrastructure to handle 5G. Because it’s been about a decade since consumers and businesses first became aware of a noticeable improvement in wireless download speeds, it’s expected that we’ll see a sustained device replacement cycle through the middle of the decade. The key here is that data consumption is expected to increase as 5G becomes more widely available — and data happens to be where AT&T generates its juiciest margins from its wireless operations.
The other transformative move was the aforementioned spin-off from WarnerMedia, which was later merged with Discovery to create a new media entity, Discovery of Warner Bros.. The completion of this merger resulted in AT&T receiving $40.4 billion in cash. It also allowed the company to reduce its base annual payment to $1.11 from just north of $2. Do not worry; you will still get a healthy return of 5.5%.
Importantly, the $40.4 billion in cash, plus the capital saved from paying a lower annual dividend, will help AT&T pay off some of the debt on its balance sheet. Having more financial flexibility should allow AT&T, which is valued at an incredibly low price-to-earnings ratio of 8 in 2022, to outperform in a difficult environment.
AGNC Investment Corp. : yield of 12.03%
Another extremely safe high-yielding dividend stock to buy with growing recession fears is the Mortgage Real Estate Investment Trust (REIT). AGNC Investment Corp. (AGNC 0.34%).
Without getting too technical, mortgage REITs like AGNC aim to borrow money at low short-term rates and use that capital to buy higher-yielding long-term assets, such as mortgage-backed securities. (MBS) – that’s why they’re called “mortgage” REITs. The goal for these companies is to maximize their net interest margin, which is the difference between the average return on assets held minus their average borrowing rate.
One of the best things about the mortgage REIT industry is that it is very transparent. Investors simply need to look at Treasury yield curves and Fed monetary policy to understand the performance of mortgage REITs.
At the moment, things are difficult for AGNC. A flattened yield curve and rising interest rates weighed on its book value. Most mortgage REITs tend to trade very close to their respective book values. However, rising interest rates should also help the company’s MBS generate higher returns over time. That means patient investors should experience net interest margin expansion sooner rather than later with AGNC.
Equally important is the fact that AGNC almost exclusively buys agency securities – $66.9 billion of its $68.6 billion in investment assets are agency-grade. “Agency” securities are federally protected in the event of default. This protection allows AGNC to prudently use leverage to its advantage in order to increase its profitability.
If you still need more conviction, consider this: AGNC has averaged double-digit returns in 12 of the past 13 years, meaning it can replace historically high inflation.
Enterprise Product Partners: 7.04% return
The third extremely safe high-income stock to buy if the US officially enters a recession is an oil and gas company Enterprise Product Partners (EPD 0.60%).
For some of you, the idea of growing your money in anything oil or natural gas related may not be the right fit. After all, just two years ago, the COVID-19 lockdowns caused a historic drop in demand for crude oil. It was the same drawdown that briefly pushed West Texas Intermediate oil futures to negative $40 a barrel.
What if I told you that Enterprise Products Partners has not been impacted in the least by the volatility experienced during the pandemic? The not-so-subtle secret of Enterprise Products Partners is that they are a middleman operator. It manages the transportation, storage and, in some cases, the processing/refining of oil, natural gas and natural gas liquids.
The beauty of intermediary operators is that the vast majority of them use volume-based contracts or fixed fees. This means they can accurately predict their operating cash flow for any given quarter or year. This predictability is critical as it allows Enterprise Products Partners to reserve capital for new infrastructure projects and make acquisitions without hurting its profitability or quarterly distribution.
Speaking of quarterly payouts, at no time during the 2020 pandemic-caused economic crisis has the company’s payout coverage ratio (DCR) fallen below 1.6. DCR measures the amount of distributable cash flow generated in a year compared to what was actually paid out to shareholders. A number below 1 would mean an unsustainable distribution schedule.
With crude oil and natural gas now reaching multi-decade highs, we are likely to see drilling and exploration activity resume. This should further strengthen Enterprise Products Partners’ payout, which has increased in each of the past 23 years.