You might not realize it, but stock market corrections are quite common. Since the beginning of 1950, the S&P 500, which is often viewed as the most-encompassing barometer of stock market health, has endured 39 double-digit percentage declines, courtesy of data from sell-side consultancy firm Yardeni Research. Last year represented the most-recent of these 39 declines, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, all falling into a bear market.
When the uphill climb becomes steeper on Wall Street, investors tend to turn their attention to dividend stocks.
Image source: Getty Images.
Companies paying a regular dividend are typically profitable, have well-defined long-term growth outlooks, and have (usually) demonstrated their ability to weather stock market/economic downturns. It also doesn't hurt that income stocks have an extensive history of outperforming their non-paying peers over long periods.
The challenge for income seekers is balance yield and risk. While higher yields are more enticing, risk tends to correlate with yields of 4% and higher (i.e., the cutoff for a high-yield payout). After perusing more than 200 securities with yields above 4% and market caps north of $2 billion, two high-yield dividend stocks stood out as no-brainer buys. Meanwhile, another popular high-yield dividend stock is best avoided by income seekers.
High-yield dividend stock No. 1 to buy hand over fist: AT&T (5.85% yield)
The first high-yield dividend stock that's begging to be bought by opportunistic investors during a bear market is telecom stock AT&T (T 1.10%).
Perhaps the biggest knock against AT&T over the past 10 years is that it's not a high-growth company. When interest rates were at or near historic lows throughout the 2010s, investors gravitated to businesses capable of sustained double-digit growth. Since AT&T is a mature company that's saturated the U.S. along with its two key wireless competitors, Verizon Communications and T-Mobile, it was largely forgotten by the investing community. But with the Fed shifting its monetary policy and the major stock indexes plunging into a bear market, AT&T is back in the spotlight for a variety of reasons.
The big catalyst continues to be AT&T boosting wireless download speeds by upgrading its infrastructure to support 5G. While costly and time-consuming, improving its infrastructure will entice users to upgrade their wireless devices and consume more data -- and data happens to be where AT&T's wireless segment generates its best margins.
AT&T is also enjoying consistently strong broadband additions. Even though broadband growth isn't remotely close what it was 20 years ago, broadband customers provide steady cash flow for AT&T, as well as opportunities to boost its margin via bundling opportunities. The company has added at least 1 million AT&T Fiber accounts in each of the past five years, and is targeting broadband revenue growth of 5%, if not more, in 2023.
Additionally, wireless access and smartphones have evolved into basic necessities. Even if the U.S. were to dip into a recession, AT&T's wireless and broadband churn rates are unlikely to rise much, if at all. This provides further cash-flow consistency and all but ensures AT&T can continue doling out its nearly 5.9% yield.
AT&T looks like an absolute steal at less than 8 times Wall Street's forecast earnings for 2023.
High-yield dividend stock No. 2 to buy hand over fist: Enterprise Products Partners (7.6% yield)
The second high-yield dividend stock you can comfortably buy hand over fist is a company I've previously opined might be the safest ultra-high-yield company on the planet: energy stock Enterprise Products Partners (EPD 1.41%).
Some income investors might hear the words "energy stock" and shudder. That's because oil and natural gas stocks were thrown out with the bath water during initial lockdowns for the COVID-19 pandemic. Although Enterprise Products Partners' share price was briefly under pressure, its operating performance was minimally impacted.
The reason Enterprise is able to avoid the tumult that usually accompanies wild swings in the price of crude oil and natural gas is because it's a midstream energy company. Its job is to transport and store crude oil, natural gas, natural gas liquids (NGL), and refined products. The more than 50,000 miles of transmission pipeline it operates, as well as the 260 million barrels of storage capacity for oil, natural gas, and NGLs, makes it one of the largest midstream operators in the country.
However, being an energy middleman is only part of the recipe for success. The company's contracts are another crucial component to its profitability and steady operating cash flow. In 2022, roughly three-quarters of the company's gross operating margin derived from long-term, fee-based contracts signed with upstream drillers. Fee-based contracts remove inflation and spot-price volatility from the equation, which is what gives Enterprise Products Partners' management team the confidence to deploy billions of dollars annually for infrastructure projects, acquisitions, and its tip-top distribution.
To add to this point, Enterprise closed out 2022 with one dozen major projects in the works at a cost of approximately $5.8 billion. Nine of these projects are expected to come online by the first quarter of 2024. That's additional revenue and operating cash flow for a company valued at a reasonable 10 times forecast earnings in 2023.
Lastly, Enterprise Products Partners has been raising its base annual distribution for a quarter of a century, which is what makes its 7.6% yield all the more rock-solid.
Image source: Getty Images.
The high-yield dividend stock to avoid like the plague: Kraft Heinz (4.11% yield)
But not every brand-name, high-yield stock is necessarily worth investing in. Despite being a large holding for Warren Buffett's company, Berkshire Hathaway, packaged foods, snacks, and condiments provider Kraft Heinz (KHC 1.80%) is a high-yield stock to avoid like the plague.
Before raking Kraft Heinz over the coals, there are a few positives to note. To begin with, it's been a surefire pandemic beneficiary. With people forced to stay home, Kraft Heinz's easy-to-make meals and snacks became household staples.
I'd be remiss if I didn't also point out that Kraft Heinz is behind some well-known, iconic food brands. Aside from the obvious (Kraft and Heinz), it's the parent of Cool Whip, Oscar Mayer, Jell-O, Velveeta, Kool-Aid, and Philadelphia, among others. Owning brands consumers know and love makes it easy to pass along price hikes when inflation bites. Through the first nine months of fiscal 2022 -- Kraft Heinz is slated to report its full-year results on Wednesday, Feb. 15 -- the company had lifted prices by an average of 12.3%.
But it's not all peaches and cream (or should I say mac-n-cheese?) for Kraft Heinz. Although it's been able to pass along significant price hikes, those increases are beginning to come with a price.
As the U.S. economy slows/weakens, some consumers are choosing to trade down to less-costly alternatives. Through the first nine months of fiscal 2022, Kraft Heinz's volume/mix was actually down 2.8% from the prior-year period, with declines seen in North America and international markets. Whereas consumer staples stocks are often a safe-haven investment during a recession, Kraft Heinz and its premium brands might be the opposite.
Kraft Heinz also has virtually no wiggle room to reignite interest in its brands. As of Sept. 24, 2022, the company was lugging around a little over $20 billion in long-term debt, compared to $997 million in cash and cash equivalents. Its balance sheet featured $30.6 billion in goodwill and $42.4 billion in intangible assets as well. In other words, there's sizable future writedown potential here and nowhere near enough capital to boost its marketing efforts.
Despite being valued at a seemingly reasonable 14 times Wall Street's forecast earnings for 2023, Kraft Heinz and its 4.1% yield are pricey given its lack of estimated net sales growth this year. That makes this well-known stock easily avoidable.
