In many ways, 2022 has been one of the most challenging years for investors. On the heels of the highest inflation reading in more than 40 years (9.1% in June), the benchmark S&P 500 delivered its worst first-half performance since 1970.
Perhaps even more worrying is the fact that the US economy appears to be on the verge of a recession. US gross domestic product has declined in each of the last two quarters, and several of Wall Street’s biggest companies have struck a cautious tone about their near-term growth prospects. Although recessions are an inevitable part of the business cycle, American workers rarely, if ever, look forward to their arrival.
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But the story is a bit different for the investment community. Stock market declines caused by recessions, or even the possibility of the US slipping into a recession, create unique opportunities for long-term investors to jump on.
It may be an especially smart time to put your money to work in high-yielding dividend stocks (those with returns of 4% or more). Companies that pay dividends regularly are often time-tested and profitable on a recurring basis. In other words, these are companies that have been through recessions before and come out strong at the other end.
Additionally, dividend stocks offer a rich history of outperforming their non-paying peers. A JP Morgan Asset Management report published in 2013 showed that companies that started and increased their annual base payments between 1972 and 2012 averaged a 9.5% annual return. By comparison, non-dividend stocks struggled to achieve a meager 1.6% annualized return over the same 40-year period.
What follows are three of the safest high-yield dividend stocks to buy if the US plunges into recession.
Enterprise Product Partners: 7.23% return
One of the smartest and safest high-yield income stocks to put your money to work with if the US economy continues to weaken is the middle oil and gas trader. Enterprise Product Partners (EPD 0.42%). This is a company that increased its base annual distribution in each of the last 24 years.
Understandably, the idea of investing in oil and gas stocks during a recession may not seem like the smartest idea. After all, demand for oil and gas fell off a cliff during the short-lived economic downturn in 2020 caused by the COVID-19 pandemic. However, Enterprise Products Partners is not like the drilling companies that took it on in 2020. That’s because it’s a mid-tier operator.
As of mid-August, the company operated more than 50,000 miles of transmission pipeline, had 14 billion cubic feet of natural gas storage space, and oversaw 19 deepwater docks and 24 natural gas processing facilities. Midstream operators are effectively power brokers who rely on fixed rate or volume-based contracts to generate highly predictable cash flow. No matter how volatile oil or natural gas prices become, Enterprise Products Partners’ operating cash flow remains transparent and predictable.
In addition, the company’s distribution coverage ratio (DCR), that is, the amount of distributable cash flow from operations relative to what is paid to investors, did not fall below 1.6 during the pandemic. . A DCR of 1 or less would mean an unsustainable payment.
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US Bancorp: 4.04% yield
Normally, when recessions hit, investors flee bank stocks. But due to unique circumstances during the current bear market and economic environment, the regional high-yield bank US Bank (USB 1.30%) looks like an exceptionally safe buy for patient investors. US Bancorp is the parent of the more familiar US Bank.
While most money center banks run into trouble by pursuing riskier derivative investments, US Bancorp’s predominantly conservative management team sticks to the bread and butter of banking: increasing its loans and deposits. Avoiding the same pitfalls as its larger peers has allowed US Bancorp to generate a superior return on assets among the big banks.
To add, this is the first time we have witnessed the Federal Reserve aggressively raising interest rates in a stock market in decisive decline. Higher interest rates help banks by raising the interest rate on outstanding variable-rate loans. Even if loan delinquency rates rise, the increase in net interest income on outstanding variable-rate loans should drive bank profits higher.
US Bancorp has also done a phenomenal job of encouraging their customers to bank digitally. As of May 31, 2022, 82% of active customers were banking online or through a mobile app. More impressive still, 64% of loan sales were completed digitally, which is an increase from 45% in early 2020. Digital transactions are considerably cheaper for banks than interactions in person or over the phone.
Verizon Communications: 6.2% yield
A third exceptionally safe high-yield dividend stock to buy if the US falls into a recession is the telecom giant. Verizon Communications (VZ -0.05%). Investors would have to go back more than a decade to find the last time Verizon doled out a return of more than 6%.
The beauty of the largest telecom stocks in the United States is that they are predictable. Verizon’s total retail postpaid churn rate was just 1.03% in the quarter ending June, indicating that its customers tend to stick around. Additionally, having a phone and Internet access has become a basic necessity for most Americans. While Verizon may not be completely immune to historically high inflation and the effects of short-term economic weakness, most of its operating cash flow is extremely safe.
Even though Verizon’s growth heyday is long gone, there are still growth catalysts that can steadily raise the earnings needle for one of America’s largest telecommunications companies. For example, the 5G revolution should be a multi-year profit driver for the company. While upgrading your wireless infrastructure won’t come cheap, the payoff should be a significant increase in data usage among your wireless customers. Data is where the company’s wireless segment generates its juiciest margins.
Verizon also spared no expense to buy mid-band 5G spectrum. The company aims to reach 50 million homes and 14 million businesses with its 5G broadband services by the end of 2025. Bolstering the reach of its broadband services should increase its operating cash flow and encourage pooling between your residential customers.
