When the curtain closes on 2021 tomorrow, it'll assuredly go down as another above-average year for the widely followed S&P 500. With a gain of close to 26% through last weekend, the broad-based index had more than doubled-up its average annual total return of 11% over the past four decades.
Unfortunately, 2022 may not be as kind to Wall Street. History and multiple data points suggest that a stock market crash or a steep correction could be on the horizon.
Though every dip in the market is a buying opportunity for long-term investors, not every investor looks forward to those dips. If you're an investor who grimaces at the thought of market volatility, buying safe stocks is a good way to ensure you'll sleep well at night.
If you've got $3,000 at the ready, which won't be needed for bills or emergencies, the following five safe stocks can be bought right now for 2022.
First up is electric utility stock NextEra Energy (NEE 0.64%). Over the past 20 years, NextEra has delivered a positive total return, including dividends, in 19 of them.
The beauty of the electric utility operating model is that it's highly predictable. Homeowners, renters, and businesses need electricity, and demand for electricity doesn't change much from year to year. Plus, with very high barriers to entry, most electric utilities operate as monopolies or duopolies, further enhancing the predictability of their cash flow and their ability to pay an above-average dividend.
What allows NextEra Energy to stand out from the crowd is the company's focus on renewable energy. No utility in the country is generating more capacity from solar or wind power than NextEra, and this is unlikely to change anytime soon. NextEra has allocated between $50 billion and $55 billion for new infrastructure projects between 2020 and 2022.
Although green-energy projects can be pricey, interest rates are near historic lows, and the benefit of lower-cost electricity has lifted NextEra's growth rate to the high single digits for more than a decade. Comparatively, most electric utilities are growing by a low single-digit rate.
NextEra's 1.7% dividend yield might not be anything to write home about, but its track record and execution are top-notch among utilities.
Annaly Capital Management
It may not be a loved stock or industry, but mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 1.59%) is another safe stock investors can confidently put $3,000 to work in for 2022.
The mortgage REIT industry is fairly simple to demystify. Companies like Annaly are looking to borrow money at lower short-term rates and use this capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBSs). The difference in average yield received from MBSs minus the average short-term borrowing rate is known as net interest margin. Annaly is always looking for ways to boost its net interest margin.
Mortgage REITs like Annaly tend to be very sensitive to interest rates -- or I should say quick and unpredictable movements in interest rates. If the Federal Reserve carefully telegraphs its moves, the company has plenty of opportunity to adjust its asset portfolio to maximize profits.
What's more, mortgage REITs tend to outperform during the early years of an economic recovery, which is where we are now. When bouncing back from a recession, it's not uncommon for the interest rate yield curve to steepen (i.e., the gap widens between short- and long-term Treasury bond yields). When this happens, Annaly's net interest margin typically widens.
Annaly Capital Management also almost exclusively purchases agency assets. Agency securities are backed by the federal government in the event of a default. Having this added protection allows the company to prudently use leverage to its advantage.
Annaly is a safe, low-volatility income stock paying out a hearty 10.7% dividend yield.
Looking back decades, few investments have been safer than riding the coattails of Warren Buffett's company, Berkshire Hathaway (BRK.A 0.83%) (BRK.B 1.21%). For those of you with $3,000 to invest, you'd want to focus on the Class B shares (BRK.B) given that the Class A shares (BRK.A) will set you back close to $445,000.
One of the key reasons Buffett has excelled as an investor is his focus on cyclical businesses. Even though recessions are an inevitable part of the economic cycle, Buffett is well aware that periods of expansion are measured in years, whereas recessions last a few months or a couple of quarters. The Oracle of Omaha is playing a simple numbers game where time is his greatest ally.
Berkshire Hathaway's investment portfolio is also packed with profitable, time-tested, dividend-paying companies. This year, Buffett's company very likely pulled in more than $5 billion in dividend income, including preferred-share dividends. Based on the initial cost basis of Berkshire Hathaway's investment portfolio, we're talking about a yield on cost of around 5%.
Since taking over as CEO in 1965, Buffett has led his company's stock to an average annual return of 20%. Taking into account Berkshire's year-to-date gains for 2021, he's overseen the creation of more than $600 billion in market value and a better than 3,500,000% aggregate gain in 56 years. That's proven consistency investors can count on.
Visa and Mastercard
Lastly, investors with $3,000 who are looking for a safe but effective place to put it to work should consider payment-processing kingpins Visa (V 1.39%) and Mastercard (MA 1.16%). I'm placing these two companies together because their operating models are virtually identical.
Not to sound like a broken record, but cyclical businesses with clear-cut competitive advantages are a smart way to invest if you're concerned about market volatility. Though Visa and Mastercard do struggle when consumers and businesses pull back on their spending during periods of recession, these two companies spend a disproportionate amount of time reveling in a growing U.S. and global economy. Once again, it's a simple numbers game with these two payment-processing leaders.
Something else that makes Visa and Mastercard especially safe is their avoidance of lending. While both would likely have no trouble generating interest income and fees as lenders, it would also expose them to inevitable credit delinquencies during economic contractions and recession. Not acting as lenders is what allows these two companies to bounce back from recessions faster than virtually all other financial stocks.
It doesn't hurt that Visa and Mastercard have a long runway of opportunity, either. They're the respective No. 1 and No. 2 in the U.S. in terms of credit card network purchase volume (as of 2018), and they should be able to expand their payment infrastructure to underbanked regions of the world. After all, more than half of all global transactions are still being conducted in cash.
Visa and Mastercard are the perfect duo for investors who still want double-digit growth potential, but without all the added risks that can come with unproven growth stocks.