Few things raise investors' eyebrows more than the dreaded "R" word: recession.
Although recessions are an inevitable part of the economic cycle, they have a tendency to bring volatility and unpredictability to Wall Street. The bulk of Wall Street's bear market losses have, historically, occurred after an official recession is declared by the eight-economist panel of the National Bureau of Economic Research. What's more, no bear market after World War II has bottomed prior to an official U.S. recession.
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Dividend stocks can be smart investments during economic downturns
Last month, when the minutes from the Federal Open Market Committee's (FOMC) March meeting were released, a new outlook caught investors' attention. As noted within the meeting minutes:
Given their [the FOMC staff] assessment of the potential economic effects of the recent banking-sector developments, the staff's projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.
In other words, the nation's central bank expects a recession to materialize later this year. While that could mean bad news in the very short-term for certain sectors and industries, it opens the door for income investors to snag some amazing deals.
As a reminder, publicly traded companies that pay a regular dividend tend to be recurringly profitable, time-tested, and have transparent long-term outlooks. Best of all, a report from JPMorgan Chase division J.P. Morgan Asset Management found that dividend stocks mopped the floor with non-dividend-paying stocks, in terms of annualized return, over the 40-year period examined (1972-2012).
What follows are two ultra-high-yield dividend stocks that stand out as no-brainer buys if a recession is on its way.
Ultra-high-yield dividend stock No. 1 that's a no-brainer buy: Verizon Communications (6.94% yield)
The first ultra-high-yield income stock investors shouldn't have any trepidation about purchasing now or at any point in the coming weeks or months is telecom stock Verizon Communications (VZ 1.17%). Normally, I use 7% as my line-in-the-sand cutoff for "ultra-high-yield" dividend status, but I'll fudge the rules a bit for a quality income stock like Verizon, which sits just six basis points below a 7% yield.
What allows income stocks to outperform during a recession is predictability, and that's what telecom stocks bring to the table. Even though businesses and consumers tend to be more mindful of their spending habits during a recession, there are certain goods and services they refuse to give up. Based on the sustainably low churn rates Verizon has reported for years, it's safe to say that owning a smartphone and having wireless/broadband access are now basic necessity goods and services. In short, Verizon's cash flow during a recession should be virtually indecipherable from a period of economic expansion.
Though Verizon is certainly a safe stock and a smart way to hedge your downside if a recession does occur, it's important to note that it's a company with share price appreciation potential, too. While the growth needle doesn't move nearly as quickly as it did 30 years ago, Verizon has a couple of well-defined catalysts still capable of delivering for shareholders.
As you might have guessed, the 5G wireless revolution is playing a role. Since it took about 10 years for wireless download speeds to be upgraded from 4G LTE to 5G, there should be a steady stream of consumer-and-business-driven device replacements to come. The benefit for Verizon comes in the form of increased data consumption. An increase in data consumption among consumers should lead to higher operating margin for the company's wireless segment.
The other growth driver that isn't getting nearly enough credit is broadband. Verizon more than doubled its mid-band spectrum in March 2021, and it paid a pretty penny to do so ($52.9 billion, including incentive payments and clearing costs). This C-band spectrum it purchased will allow the company to reach 50 million households and 14 million businesses with 5G internet service by the end of 2025. In the March-ended quarter, Verizon had 437,000 net broadband additions, which marks its best quarter for broadband adds in more than a decade.
At less than 9 times Wall Street's consensus profit for the company in 2023 and 2024, Verizon offers minimal risk with ample long-term reward.
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Ultra-high-yield dividend stock No. 2 that's a no-brainer buy: Enterprise Products Partners (7.56% yield)
The second ultra-high-yield dividend stock that makes for a surefire buy if the U.S. dips into a recession as the FOMC has modeled is energy company Enterprise Products Partners (EPD 0.45%). Enterprise is doling out a nearly 7.6% yield and has increased its base annual distribution in each of the past 25 years.
Typically, oil and gas stocks aren't what come to mind when considering no-brainer investments during a recession. That's because crude oil and natural gas demand declines during an economic downturn, which often weighs on the spot prices of energy commodities.
However, Enterprise Products Partners is a special breed of energy stock. It's a midstream operator, which effectively means it acts as a middleman for the massive U.S. energy complex. It operates more than 50,000 miles of transmission pipeline, can store 14 billion cubic feet of natural gas and over 260 million barrels of liquids, and operates 20 deepwater docks.
The not-so-subtle secret to Enterprise's success is its contracts with drilling companies. During the first quarter, more than 70% of its contracts were fixed-fee. A fixed-fee contract eliminates inflation and spot-price volatility from the equation and ensures a predictable level of cash flow from one quarter to the next. Cash-flow predictability is particularly important for a midstream behemoth like Enterprise Products Partners, which is constantly allotting capital for new projects and its distribution.
In addition to predictable operating cash flow, Enterprise Products Partners has a transparent growth runway. It's invested approximately $6.1 billion in more than a dozen major projects, many of which are focused on natural gas liquids. All of these projects are expected to come online between the second quarter of this year and the end of 2025. These new projects are what (pardon the pun) fuel earnings growth and distribution expansion.
If you need another reason to be excited about Enterprise Products Partners, consider the globally challenged energy supply chain. Russia's invasion of Ukraine, coupled with three years of global underinvestment tied to the pandemic, has made it difficult to increase the worldwide supply of certain energy commodities. Though a recession could have a temporary negative effect on the spot price of crude oil, energy supply chain woes should provide a lift. This longer-term pricing support is expected to encourage additional drilling and provide Enterprise with an opportunity to lock up new long-term contracts.
Enterprise Products Partners looks like a genuine bargain at less than 10 times forecast earnings in 2023 and 2024.
