In many ways, 2022 has been one of the most challenging years on record for investors. On the heels of the highest inflation reading in more than 40 years (9.1% in June), the benchmark S&P 500 delivered its worst first-half return since 1970.
Perhaps even more worrisome is the fact that the U.S. economy appears to be teetering on the brink of a recession. U.S. gross domestic product has declined in each of the past two quarters, and a number of Wall Street's largest companies have sounded a cautious tone on their near-term growth prospects. Although recessions are an inevitable part of the economic cycle, working Americans rarely, if ever, look forward to their arrival.
Image source: Getty Images.
But the story is a bit different for the investing community. Declines in the stock market caused by recessions -- or even the prospect of the U.S. dipping into a recession -- create unique opportunities for long-term investors to pounce.
It can be an especially smart time to put your money to work in high-yielding dividend stocks (those with yields of 4% or above). Companies that regularly pay a dividend are often time-tested and profitable on a recurring basis. In other words, these are businesses that've navigated their way through recessions before and come out stronger on the other end.
Furthermore, dividend stocks offer a rich history of outperforming their non-paying peers. A J.P. Morgan Asset Management report released in 2013 showed that companies initiating and increasing their base annual payouts between 1972 and 2012 averaged a 9.5% annual return. By comparison, stocks not offering a dividend struggled their way to a meager 1.6% annualized return over the same 40-year period.
What follows are three of the safest high-yield dividend stocks to buy if the U.S. dips into a recession.
NYSE: EPD
Key Data Points
Enterprise Products Partners: 7.23% yield
One of the smartest and safest high-yield income stocks to put your money to work in if the U.S. economy continues to weaken is oil and gas midstream operator Enterprise Products Partners (EPD +2.46%). This is a company that's increased its base annual distribution in each of the past 24 years.
Understandably, the idea of investing in oil and gas stocks during a recession may not sound like the smartest idea. After all, oil and gas demand fell of a cliff during the short-lived economic downturn in 2020 caused by the COVID-19 pandemic. However, Enterprise Products Partners isn't like the drilling companies that took it on the chin in 2020. That's because it's a midstream operator.
As of mid-August, the company was operating more than 50,000 miles of transmission pipeline, had 14 billion cubic feet of natural gas storage space, and was overseeing 19 deepwater docks and 24 natural gas processing facilities. Midstream operators are effectively energy middlemen that lean on fixed-fee or volume-based contracts to generate highly predictable cash flow. No matter how volatile oil or natural gas prices become, Enterprise Products Partners' operating cash flow remains transparent and predictable.
What's more, the company's distribution coverage ratio (DCR) -- i.e., the amount of distributable cash flow from operations relative to what's paid to investors -- didn't fall below 1.6 during the pandemic. A DCR of 1 or lower would signify an unsustainable payout.
Image source: U.S. Bank.
U.S. Bancorp: 4.04% yield
Normally, when recessions strike, investors run away from bank stocks. But due to unique circumstances during the current bear market and economic environment, high-yield regional bank U.S. Bancorp (USB +1.29%) looks like an exceptionally safe buy for patient investors. U.S. Bancorp is the parent of the more familiar U.S. Bank.
Whereas most money-center banks get themselves into trouble by chasing riskier derivative investments, U.S. Bancorp's predominantly conservative management team sticks with the bread-and-butter of banking: growing its loans and deposits. Avoiding the same pitfalls as its larger peers has allowed U.S. Bancorp to generate superior return on assets among big banks.
To add, this is the first time we're witnessing the Federal Reserve aggressively increase interest rates into a decisively falling stock market. Higher interest rates help banks by increasing the lending rate on outstanding variable-rate loans. Even if loan delinquency rates increase, the boost in net interest income from outstanding variable-rate loans should push bank profits higher.
U.S. Bancorp has also done a phenomenal job of encouraging its customers to bank digitally. As of May 31, 2022, 82% of active customers were banking online or via mobile app. More impressively, 64% of loan sales were completed digitally, which is up from 45% at the beginning of 2020. Digital transactions are considerably cheaper for banks than in-person or phone-based interactions.
NYSE: VZ
Key Data Points
Verizon Communications: 6.2% yield
A third exceptionally safe high-yield dividend stock to buy if the U.S. dips into a recession is telecom giant Verizon Communications (VZ 0.32%). Investors would have to go back more than a decade to find the last time Verizon was doling out a yield in excess of 6%.
The beauty of the United States' biggest telecom stocks is they're predictable. Verizon's total retail postpaid churn rate was just 1.03% in the June-ended quarter, which signals that its customers tend stick around. Further, having a phone and access to the internet has evolved into something of a basic necessity for most Americans. While Verizon may not be completely immune to historically high inflation and the effects of near-term economic weakness, the lion's share of its operating cash flow is extremely safe.
Even though Verizon's growth heyday has long since passed, there are still growth catalysts that can steadily move the profit needle higher for one of America's biggest telecom companies. For example, the 5G revolution should be a multiyear profit driver for the company. While upgrading its wireless infrastructure won't be cheap, the payoff should be a sizable increase in data consumption among its wireless customers. Data is where the company's wireless segment generates its juiciest margins.
Verizon also spared no expense to purchase 5G mid-band spectrum. The company has a goal of reaching 50 million households and 14 million businesses with its 5G broadband services by the end of 2025. Bolstering the reach of its broadband services should increase its operating cash flow and encourage bundling among its residential customers.
