3 Extremely Safe High Yield Dividend Stocks to Buy If the US Plunges into a Recession | the motley fool

There is no doubt that this has been a challenging year for investors. Since they reached their respective record closing highs during the first week of January, both the Dow Jones Industrial Average Y S&P 500 have fallen into correction territory (ie, fallen by at least 10%). Things are even worse for those dependent on growth Nasdaq Compositewhich has lost almost 30% of its value since reaching its all-time high in November.

This turbulence appears to be directly related to growing fears of a recession in the United States. First-quarter gross domestic product fell an astonishing 1.4%, and historically high inflation certainly appears to be taking a toll on low-income consumers, as evidenced by walmart‘sand GoalThe latest operating results of .

Dividend Stocks Can Be Your Golden Ticket to Riches

However, when viewed through a broader lens, the latest corrections, including the Nasdaq bear market, serve as an opportunity for patient investors to take the plunge. Eventually, all notable declines in the market are completely wiped out by a bull market rally.

Arguably one of the smartest ways to put your money to work during a recession is to buy dividend stocks. Companies that pay dividends are often profitable on a recurring basis and are proven in the sense that they have been through recessions before.

Additionally, dividend stocks have a rich history of outperforming their non-dividend-paying peers. According to a report by JP Morgan Asset Management, a division of the nation’s largest bank by assets, JPMorgan ChaseDividend stocks averaged a 9.5% annual return between 1972 and 2012. Comparatively, public companies that didn’t offer a payout averaged a meager 1.6% annual return over the same period.

Dividend stocks have the potential to mitigate short-term decline, combat historically high inflation, and ultimately make patient investors rich over time.

What follows are three extremely safe high-yield dividend stocks for investors to buy if the US falls into recession.

AT&T: 5.49% yield

The first exceptionally safe high-yield income stock to buy with rising recession fears is the telecoms giant. AT&T (T 0.94%). When adjusted for WarnerMedia’s spin-off of the company, AT&T stock is actually higher For the year.

Although AT&T’s high-growth glory days are behind it, the company has a number of catalysts capable of generating modest organic growth and slowly but surely driving its share price higher.

For example, AT&T’s biggest catalyst is the 5G revolution. Over the next two years, it will spend billions of dollars upgrading its wireless infrastructure to handle 5G. Since it has been roughly a decade since consumers and businesses became aware of a noticeable improvement in wireless download speeds, the expectation is that we will see a sustained cycle of device replacement through the middle of the decade. The key here is that data consumption should increase as 5G becomes more widely available, and data is where AT&T makes its juiciest margins from its wireless operations.

The other transformative move was the aforementioned spin-off of WarnerMedia, which subsequently 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 lower its base annual payment to $1.11 from just over $2. Don’t worry; you’ll still get a healthy net return of 5.5%.

The bottom line is that the $40.4 billion in cash, along with the capital saved by paying a lower annual dividend, will help AT&T address some of the debt on its balance sheet. Having substantially greater 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 challenging environment.

AGNC Investment Corp.: 12.03% yield

Another extremely safe high-yielding dividend stock to buy with rising recession fears is the mortgage-backed 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 this capital to buy higher-yielding long-term assets like mortgage-backed securities (MBS), which is why they’re called “mortgage” REITs. The goal of these companies is to maximize their net interest margin, which is the difference between the average return on the assets they own minus their average interest rate.

One of the best aspects of the mortgage REIT industry is that it is highly transparent. Investors simply need to look at Treasury yield curves and Federal Reserve monetary policy to understand how mortgage REITs are performing.

At the moment, things are challenging for AGNC. A flattened yield curve and rising interest rates have hurt 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. This means that patient investors should experience net interest margin expansion sooner rather than later with AGNC.

Equally important is the fact that AGNC buys almost exclusively agency securities: $66.9 billion of its $68.6 billion in investment assets are of the agency variety. “Agency” securities are protected by the federal government in case of default. This protection allows AGNC to use leverage prudently in its favor to increase its profitability.

If you still need more conviction, consider this: AGNC has averaged double-digit returns in 12 of the last 13 years, meaning it can put historically high inflation in its place.

Enterprise Product Partners: 7.04% return

The third extremely safe high-yielding income stock to buy if the US officially enters a recession is the oil and gas company. Enterprise Product Partners (EPD 0.60%).

For some of you, the idea of ​​putting your money to work on anything to do with oil or natural gas may not be a good one. After all, it was only two years ago that the COVID-19 lockdowns led to a historic reduction in demand for crude oil. This is the same drawdown that briefly pushed West Texas Intermediate oil futures to negative $40 a barrel.

But what if I told you that Enterprise Products Partners was not affected in the least by the volatility experienced during the pandemic? The not-so-subtle secret of Enterprise Products Partners is that it’s a middleman. It handles the transmission, storage, and, in some cases, processing/refining of oil, natural gas, and natural gas liquids.

The beauty of midstream carriers is that the vast majority of them use fixed fee or volume-based contracts. This means that they can accurately predict your operating cash flow for a 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 negatively impacting their quarterly profitability or delivery.

Speaking of quarterly distribution, at no point during the 2020 economic collapse caused by the pandemic did the company’s Distribution Coverage Ratio (DCR) fall below 1.6. The DCR measures the amount of distributable cash flow generated in a year relative to what was actually paid out to shareholders. A figure below 1 would mean an unsustainable distribution program.

With crude oil and natural gas hitting multi-decade highs, we are likely to see an uptick in exploration and drilling activity. This should further solidify the payout for Enterprise Products Partners, which has grown in each of the last 23 years.