There's no question that this has been a challenging year for investors. Since hitting their respective all-time closing highs during the first week of January, both the Dow Jones Industrial Average and S&P 500 have tumbled into correction territory (i.e., fallen at least 10%). Things are even worse for the growth-dependent Nasdaq Composite, which shed nearly 30% of its value since hitting its record high in November.
This turbulence looks to be directly related to growing fears of a recession in the United States. First-quarter gross domestic product retraced by a surprising 1.4%, and historically high inflation certainly appears to be adversely affecting lower-income consumers, as evidenced by Walmart's and Target's latest operating results.
Dividend stocks can be your golden ticket to riches
However, when examined with a wider lens, the latest corrections -- including the Nasdaq bear market -- serve as an opportunity for patient investors to pounce. Eventually, all notable declines in the market are completely wiped away 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 a dividend are often profitable on a recurring basis and are time-tested in the sense that they've navigated their way through recessions before.
What's more, dividend stocks have a rich history of outperformance relative to their non-dividend-paying peers. According to a report from J.P. Morgan Asset Management, a division of the nation's largest bank by assets, JPMorgan Chase, dividend stocks averaged an annual return of 9.5% between 1972 and 2012. Comparatively, public companies that didn't offer a payout averaged a meager 1.6% annual return over the same time frame.
Dividend stocks have the potential to mitigate near-term downside, combat historically high inflation, and ultimately make patient investors richer over time.
What follows are three extremely safe high-yield dividend stocks for investors to buy if the U.S. dips into recession.
AT&T: 5.49% yield
The first exceptionally safe high-yield income stock to buy with recession fears mounting is telecom behemoth AT&T (NYSE: T). When adjusted for the company's WarnerMedia spinoff, AT&T shares are actually higher for the year.
Even though AT&T's high-growth glory days are long gone, the company does have a number of catalysts capable of generating modest organic growth and slowly but surely moving its share price higher.
For example, AT&T's biggest catalyst is the 5G revolution. For the next couple of years, it'll be investing billions of dollars in upgrading its wireless infrastructure to handle 5G. Because it's been about a decade since consumers and businesses have been privy to a notable upgrade in wireless download speeds, the expectation is that we'll witness a sustained device replacement cycle through the midpoint of the decade. The key here is that data consumption should 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 spinoff of WarnerMedia, which was subsequently merged with Discovery to create a new media entity, Warner Bros. Discovery. 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 payout to $1.11 from a little north of $2. Don't worry; you'll still be netting a healthy 5.5% yield.
What's important is that the $40.4 billion in cash, along with the capital saved from paying a lower annual dividend, will help AT&T address some of the debt on its balance sheet. Having substantially more financial flexibility should allow AT&T, which is valued at an incredibly low forecast price-to-earnings ratio of 8 in 2022, to outperform in a challenging environment.
AGNC Investment Corp.: 12.03% yield
Another extremely safe high-yield dividend stock to buy with recession fears growing is mortgage real estate investment trust (REIT) AGNC Investment Corp. (NASDAQ: AGNC).
Without getting overly technical, mortgage REITs like AGNC aim to borrow money at low short-term rates and use this capital to purchase 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 yield on assets owned minus their average borrowing rate.
One of the best aspects of the mortgage REIT industry is that it's highly transparent. Investors simply need to look at Treasury yield curves and Fed monetary policy to get an understanding of how mortgage REITs are performing.
At the moment, things are challenging for AGNC. A flattened yield curve and rising interest rates have 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 MBSs generate higher yields over time. This means patient investors should experience net interest margin expansion sooner than later with AGNC.
Equally important is the fact that AGNC almost exclusively purchases 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 the event of default. This protection allows AGNC to prudently use leverage to its advantage in order to boost its profitability.
If you still need more convincing, consider this: AGNC has averaged a double-digit yield in 12 of the past 13 years, which means it can put historically high inflation in its place.
Enterprise Products Partners: 7.04% yield
The third extremely safe high-yield income stock to buy if the U.S. officially enters a recession is oil and gas company Enterprise Products Partners (NYSE: EPD).
For some of you, the idea of putting your money to work in anything having to do with oil or natural gas may not sit well. After all, it was just two years ago that COVID-19 lockdowns led to a historic demand drawdown 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 wasn't impacted in the least by the volatility experienced during the pandemic? Enterprise Products Partners' not-so-subtle secret is that it's a midstream operator. It handles the transmission, storage, and in some instances the processing/refining of oil, natural gas, and natural gas liquids.
The beauty of midstream operators is that the vast majority of them utilize volume-based or fixed-fee-styled contracts. This means they can accurately predict their operating cash flow for a given quarter or year. This predictability proves critical since it allows Enterprise Products Partners to set aside capital for new infrastructure projects and to make acquisitions without adversely impacting its profitability or quarterly distribution.
Speaking of quarterly distribution, at no point during the 2020 economic meltdown 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 to shareholders. A figure below 1 would signify an unsustainable distribution schedule.
With crude oil and natural gas now hitting multidecade highs, we're liable to see drilling and exploration activity pick up. This should further solidify Enterprise Products Partners' payout, which has grown in each of the past 23 years.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Sean Williams has positions in AT&T and Warner Bros. Discovery, Inc. The Motley Fool recommends Enterprise Products Partners and Warner Bros. Discovery, Inc. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.