What a difference a year makes.
Last year, the benchmark S&P 500's biggest correction entailed a decline of just 5%. However, since hitting its all-time closing high during the first week of January, the widely followed index has lost as much as 24% of its value.
It's been an even bumpier ride for the technology-driven Nasdaq Composite (^IXIC 0.93%). Following its record closing high in mid-November, the Nasdaq has shed up to 34% of its value. With a decline of this magnitude, the Nasdaq is firmly entrenched in a bear market.
Image source: Getty Images.
While sizable declines in the broader market can be unnerving and unpredictable, what is relatively certain is that they represent the perfect opportunity to put your money to work. Eventually, every notable decline in the major indexes has been erased by a bull market.
The proverbial $64,000 question is: "Where should you invest your money?"
Dividend stocks offer a long history of outperformance
The no-brainer answer to this question just might be dividend stocks. Companies that pay a regular dividend are almost always profitable on a recurring basis and have navigated their way through turbulent times before. Income stocks might be boring businesses, but they're just the type of companies we'd expect would grow in value over time.
Dividend stocks also have quite the history of outperforming stocks that don't offer a payout. According to a 2013 report from J.P. Morgan Asset Management, companies that initiated and grew their payouts averaged an annual return of 9.5% over a four-decade stretch (1972-2012). Comparatively, the non-payers only managed an annualized return of 1.6% in the same 40-year period.
But not all dividend stocks are equal. In an ideal world, investors generate the maximum amount of income with low risk. Unfortunately, studies have shown that risk and yield tend to correlate once high-yield status has been reached (a yield of 4% or above). Because yield is a function of payout relative to share price, a company with a failing operating model and a plunging share price can trick unsuspecting investors into thinking they've bought a high-yield money machine, when in reality they purchased an income trap.
Although high-yield stocks certainly require some extra vetting by investors, some truly are money machines for long-term investors. With the Nasdaq mired in a bear market, the following three high-yield dividend stocks are companies you won't regret buying.
NASDAQ: WBA
Key Data Points
Walgreens Boots Alliance: 4.53% yield
The first high-yield income stock you won't regret buying during the Nasdaq bear market dip is pharmacy chain Walgreens Boots Alliance (WBA +0.00%). Walgreens is yielding 4.5% and has increased its base annual payout in each of the past 46 years.
Healthcare stocks are a smart place to put your money to work during periods of heightened volatility. No matter how well the U.S. economy or stock market perform, people will always require prescription medicines, medical devices, and healthcare services. People don't stop getting sick because the stock market has hit a rough patch. This creates a steady level of demand throughout the healthcare chain, which includes companies like Walgreens.
What's particularly exciting about Walgreens Boots Alliance is its multipoint growth strategy designed to lift its operating margins, improve its balance sheet, and bring in repeat business.
For instance, Walgreens has reduced its annual operating expenses by more than $2 billion, and it sold its wholesale drug distribution business to AmerisourceBergen for $6.5 billion in June 2021. The company used $3.8 billion from this deal to repay a term loan and lower its outstanding debt by $3.3 billion.
At the same time Walgreens has closed certain doors, it's opened others. It has spent aggressively on direct-to-consumer and digitization initiatives designed to boost its organic growth rate. Additionally, it's working with VillageMD (Walgreens is a majority owner of VillageMD) to open 1,000 co-located, full-service clinics in over 30 U.S. markets by the end of 2027. Having physicians on site should help encourage repeat visits by patients.
With Walgreens Boots Alliance's stock valued at only eight times Wall Street's profit forecast for this year, it would appear to have an extremely safe floor.
Image source: Getty Images.
Philip Morris International: 4.87% yield
Speaking of safe high-yield dividend stocks you won't regret buying during a Nasdaq bear market, say hello to tobacco stock Philip Morris International (PM +1.40%). Philip Morris is currently doling out a yield of nearly 5%.
While tobacco stocks aren't the growth story they were three decades ago, they can still deliver consistent income and steady returns for patient investors who aren't turned off by the idea of investing in vice stocks.
What makes Philip Morris so appealing is the company's geographic reach. According to the company, it operates in more than 180 countries worldwide. This means it has the ability to generate predictable cash flow in developed markets, while also enjoying higher organic growth rates in emerging markets where the middle class still views tobacco as a luxury. It also means that sales weakness derived from stricter tobacco laws in select developed markets can be partially or fully offset by growth in emerging markets.
Tobacco stocks are successful because they have incredible pricing power. Previous recessions in the U.S. and global economy have demonstrated that tobacco products are treated as non-discretionary goods. In simpler terms, consumers will keep buying them, no matter how poorly the economy performs or how much tobacco companies increase prices.
If you need another reason to be excited about Philip Morris' potential, consider its push into smoking alternatives. The company's IQOS heated tobacco system has been introduced into dozens of countries globally, with IQOS gobbling up 7.5% of heated-tobacco share in those markets. More than 30% of the company's net sales now derive from smoke-free products.
NASDAQ: AGNC
Key Data Points
AGNC Investment Corp.: 12.45% yield
A third high-yield dividend stock you won't regret buying in a Nasdaq bear market is mortgage real estate investment trust (REIT) AGNC Investment Corp. (AGNC 1.54%). AGNC is the high-water mark for yield on this list at nearly 12.5%. The company pays a monthly dividend and has averaged a double-digit yield in 12 of the past 13 years.
Mortgage REITs like AGNC seek to borrow money at the lowest short-term rate possible and use this capital to buy higher-yielding long-term assets, such as mortgage-backed securities (MBS). The wider the difference (known as "net interest margin") between the average yield on the assets AGNC owns and its average borrowing rate, the more profitable it can be.
The beauty of the mortgage REIT industry is that it's highly predictable. Keeping a close eye on Fed monetary policy and the interest rate yield curve often provides all the big-picture info investors need.
For the moment, things are pretty bad for AGNC and its peers. The nation's central bank is rapidly raising interest rates to get historically high inflation under control. To boot, the interest rate yield curve has flattened, which usually leads to reduced net interest margin and lower near-term book values for mortgage REITs.
However, this industry makes for a smart bad-news buy. That's because the yield curve spends most of its time steepening during long-winded bull markets. Also, as interest rates climb, so will the yields AGNC nets from future MBS purchases. Sooner than later, this should result in steady net interest margin expansion.
AGNC's investment portfolio is another reason investors can confidently buy. Approximately 97.5% of its investment assets are agency securities. Agency assets are backed by the federal government in the event of default. This protection allows AGNC to strategically deploy leverage in order to boost income.
Trading at a 12% discount to its tangible net book value makes AGNC a screaming buy.
