Winning in the stock market is an exceedingly simple task -- at least in theory. When top stocks go on sale, you buy. When stocks rise in price, you take profits. That's the basic idea.
In practice, however, human psychology tends to get in the way of that winning strategy. Instead of buying low and selling high, most retail investors do the opposite. The underlying reason is that we let the twin drivers of fear and greed take charge in our buying and selling decisions, which is a surefire way to lose money in the stock market.
The current market is a prime example. Numerous top-shelf stocks have cratered since the start of 2022 in response to rising interest rates, high inflation, and geopolitical turmoil, among other factors. Yet instead of buying the dip in anticipation of an eventual rebound, many investors have pulled away -- a record amount of cash has been stashed on the sidelines based on the fear that the market will correct even further in response to a possible recession.
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While this hypothesis does have a basis in reality -- in that markets do tend to move lower during the opening months of a recession -- investors would be wise to bear in mind that bull markets often form before a recession ends, and the biggest gains typically come during the initial phase of the recovery.
With this backdrop in mind, I plan on buying these two blue chip dividend stocks hand over fist in the event they pull back as part of a marketwide correction.
1. Target
Recessions are generally bad news for retailers. As consumer spending power diminishes due to layoffs and reduced hours, high-margin discretionary items like electronics and cosmetics become harder to sell. Big-box retailers therefore tend to discount this type of inventory to move it as they double down on consumer staples such as food, beverages, and hygiene products. The net result of this pivot toward lower-margin products during a recession tends to weigh on earnings.
Minneapolis-based Target (TGT 0.18%) has already started to prepare for this eventuality. In an effort to maintain at least a low single-digit-percentage revenue growth trajectory in 2023 and 2024, the discount retailer noted in its latest quarterly earnings report that it had decreased inventory levels for various discretionary items, and said it had put capital to work to streamline operations in preparation for a possible economic downturn. Target's ability to quickly adapt to a softer economy should help protect its shareholders.
Target's stock could struggle in the weeks and months ahead. But in my view, there are a couple of reasons why Target would become a table-pounding buy in the wake of any significant dips. First up, the retailer has raised its dividend annually for over half a century, making it one of the most reliable passive income vehicles within the blue chip stock landscape. Second, it has built a unique shopping experience with its cohort of owned and curated brands, its gold star partnerships with the likes of Starbucks, Disney, and Levi's, and its stellar customer loyalty programs.
All told, Target has an exceedingly bright future, a fact that bodes well for the stock's long-term prospects.
2. AT&T
AT&T (T 1.02%) is now the third-largest wireless carrier in the U.S. by customer count, behind Verizon and T-Mobile. Over the last decade, the legacy telecom company's shares lagged the broader market due to management's ill-advised decision to chase growth in non-core areas such as entertainment. This strategy caused AT&T's debt levels to swell, and it never yielded the desired results. In fact, AT&T has since divested itself of these non-core assets and doubled down on building a top-flight 5G wireless network.
Despite its pivot back toward familiar ground, AT&T's growth prospects aren't stellar. Through 2023 and 2024, Wall Street analysts expect the telecom's top line will rise by a meager 2.9%. Meanwhile, AT&T will have to contend with competitive threats from established rivals like Verizon and T-Mobile, as well as scores of cutting-edge start-ups. That's not a great setup for long-term growth.
So why is this legacy telecom giant worth considering on a pullback? One reason: AT&T pays a dividend that yields 5.61% at its current share price. With free cash flow on track to rise by 13.4% to $16 billion (or better) this year, that high-yield dividend is also well covered by ongoing operations. In short, AT&T stock is already a highly attractive passive income play. A pullback would only make its investment thesis that much stronger.
