For the first five months of 2022, investors have been given a not-so-subtle reminder that stocks can go down just as easily as they can rise in value.
Since the year began, the iconic Dow Jones Industrial Average entered correction territory with a decline of greater than 10%, while the S&P 500 (very briefly, on an intra-day basis) and Nasdaq Composite both pushed into a bear market. The latter has endured a peak-to-trough drop of as much as 31% in six months.
Although bear market declines can be scary, and the velocity of downside moves can test the resolve of investors, history has conclusively shown that putting your money to work during these downturns is a smart move. After all, every major crash, correction, and bear market throughout history has eventually been cleared away by a bull market.
In other words, it's not a matter of if you should buy; it's a matter of what to buy.
Perhaps the best answer to what to buy is dividend stocks. Because income stocks are often profitable, time-tested, and can usually provide transparent growth outlooks, they're just the type of companies we'd count on to increase in value over time -- even with corrections and bear markets mixed in.
Dividend stocks also have a knack for running circles around their non-dividend-paying peers. A 2013 report from J.P. Morgan Asset Management, a division of the nation's largest bank by assets, JPMorgan Chase, found that dividend stocks averaged an annual return of 9.5% over a four-decade stretch (1972-2012). Comparatively, publicly traded companies that didn't pay a dividend scraped and clawed their way to a meager 1.6% average annual return over the same time frame.
Right now, dividend stocks can somewhat or fully offset the effects of inflation and help long-term investors sleep better at night. What follows are three of the safest dividend stocks that have the tools needed to turn a $300,000 initial investment into $1 million by 2030.
Broadcom: 3% yield
The first extremely safe income stock with the potential to generate a 233% return on a $300,000 investment by the end of the decade is semiconductor solutions specialist Broadcom (AVGO 1.86%). Broadcom currently sports a 3% yield but has grown its quarterly payout by more than 5,700% (not a typo!) since 2010.
Like most tech stocks, Broadcom is facing a wall of worry caused by domestic recession fears and global supply chain snafus tied to COVID-19 and the war in Ukraine. But unlike most tech stocks, the company has a slew of catalysts that act as a downside buffer during the Nasdaq bear market.
For example, Broadcom generates the bulk of its revenue from selling wireless chips and accessories used in next-generation smartphones. Having a smartphone and wireless access has effectively evolved from being optional to necessary since the Great Recession. With the exception of a small dip in global smartphone sales tied to the pandemic, worldwide unit sales have continued to grow since 2007. With telecom companies steadily upgrading their infrastructure to handle 5G speeds, the expectation is that Broadcom will benefit from a multidecade device replacement cycle.
To build on this point, the company is typically locking in production orders well in advance. Broadcom ended 2021 with a record backlog of $14.9 billion and was booking orders well into 2023, per CEO Hock Tan. The key point being that demand isn't an issue, and the company offers highly predictable cash flow.
Broadcom's infrastructure solutions are another long-term bright spot. It provides connectivity and access chips used in data centers, which should come in handy with businesses shifting their data into the cloud at an accelerated pace in the wake of the pandemic. It also provides solutions for next-gen automobiles.
The cherry on the sundae is Broadcom's just-announced offer to acquire VMware (VMW 1.18%) for $61 billion in cash and stock. This deal should further diversify Broadcom's business by bringing VMware's slow but steadily growing cloud management and infrastructure solutions into the fold.
AGNC Investment Corp.: 11.9% yield
The second extremely safe dividend stock that has all the potential to turn a $300,000 investment into a cool million dollars is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 1.51%). The company's 11.9% yield is, by far, the highest on this list.
Even though the products AGNC Investment purchases can be somewhat complex, the company's business model is really easy to understand. This is a company that borrows money at low short-term lending rates and aims to use that capital to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The end goal is to increase net interest margin, which is the average yield on assets owned minus the average borrowing rate.
What makes the mortgage REIT industry so palatable for passive income investors is that it's transparent. If investors monitor activity from the Federal Reserve and pay attention to the interest rate yield curve, there are no surprises. The "yield curve" describes the variance in yields between short- and long-term Treasury bonds.
To be up-front, things aren't perfect for AGNC in the short term. A flattening yield curve coupled with the Fed scrambling to hike interest rates is weighing on AGNC's book value. Since mortgage REITs tend to hover near their respective book values, AGNC's share price performance has been unsightly.
However, there are two sides to this coin, and one shines a lot brighter than the other. You see, the yield curve spends far more time steepening than flattening over the long run. A rising-rate environment suggests AGNC is likely to benefit from higher yields on the MBSs it's buying over time. In short, patient investors should see net interest margin expand soon enough.
What's more, AGNC almost exclusively invests in agency MBSs. An agency security is backed by the federal government in the event of default. While this added protection does weigh on the yields AGNC receives from the MBSs it purchases, it also gives the company the luxury of deploying leverage to boost its profits.
Thanks to AGNC's persistent double-digit yield, it's actually outperformed the S&P 500, on a total return basis, by 68 percentage points since its initial public offering 14 years ago.
Visa: 0.7% yield
The third exceptionally safe dividend stock primed to deliver big-time returns for investors by 2030 is payment processor Visa (V 0.94%). Even though Visa's yield of 0.7% might sound disappointing next to AGNC's mammoth payout, keep in mind that Visa's share price is higher by 1,380% since its IPO in March 2008, and its quarterly payout has grown by an equally impressive 1,326% since its first distribution in August 2008.
Visa's promise and peril happen to be one and the same: its cyclical ties. On one hand, a company that's dependent on increasing consumer and enterprise spending is going to feel the pinch when a recession strikes. On the other hand, recessions only tend to last a couple of quarters. By comparison, periods of economic expansion are measured in years and can even last a decade. Buying a stake in a cyclical financial stock like Visa allows patient investors to take advantage of the natural expansion of the U.S. and global economy over time.
It also doesn't hurt that Visa is the undisputed market leader in the U.S., the top market for consumption globally. Based on filings with the Securities and Exchange Commission, Visa controlled 54% of U.S. credit card network purchase volume in 2020, among the four major payment processing networks. The next-closest competitor trailed by 31 percentage points. No payment processor expanded their share following the Great Recession quite like Visa.
This is also a company that has strategically avoided becoming a lender. Despite economic expansions lasting years, thereby offering Visa a pathway to collect interest income and fee revenue, becoming a lender would come with drawbacks. For instance, loan delinquencies usually rise during a recession, which requires lenders to set aside capital to cover loan/credit losses. Not having to set aside capital is what helps Visa bounce back from recessions so quickly and is pivotal in keeping its profit margin above 50%.
As one final note, the vast majority of global transactions are still being conducted in cash. Visa's runway to expand its infrastructure organically or via acquisition (e.g., buying Visa Europe in 2016) into new markets should help it sustain a double-digit growth rate.