Over the past year, the nation’s central bank has waged war against historically high inflation. The federal funds target rate, which had been kept at a range of 0% to 0.25% for much of the past decade, has soared to a range of 4.75% to 5%. That’s the fastest increase in the fed funds target rate — and interest rates — in more than four decades.
While the latest inflation-rate data does suggest the Fed’s aggressive actions are working, the fastest pace of rate hikes in four decades won’t be without consequences. According to the newest Federal Open Market Committee (FOMC) meeting minutes, a “mild recession” is forecast to start later this year, with the U.S. economy spending the next two years recovering.
Recessions are usually bad news for Wall Street over the short run. But when the lens is widened a bit, you’ll see that recessions offer an incredible opportunity for patient investors to scoop up high-quality stocks at a discount.
The Fed forecasting a recession is an especially good excuse for investors to consider buying dividend stocks. Dividend-paying companies are often profitable, time-tested, and have a tendency to handily outperform peers that don’t offer a payout.
If the FOMC is correct and the U.S. economy is headed for a recession in the second-half of 2023, the following three surefire, high-yield dividend stocks would make for perfect buys right now.
AT&T: 5.57% yield
The first high-yield dividend stock that makes for a rock-solid buy if the U.S. is destined for a recession is telecom giant AT&T (T).
One reason large-scale telecom stocks make for smart buys during an economic downturn is because of the near-necessity service they provide. While access to the internet, a smartphone, and wireless services may not be as vital as food or water, consumers aren’t typically willing to part with their smartphone or internet/wireless access. With churn rates near historic lows, AT&T and its peers can count on relatively predictable operating cash flow in virtually any economic environment.
Even though AT&T’s best growth days were decades ago, the company does have a few catalysts that should keep the organic growth needle pointing higher even if the U.S. economy struggles for a brief period. The 5G revolution tops the list. After a decade of 4G LTE download speeds, the proliferation of 5G infrastructure should encourage businesses and consumers to upgrade their devices. The payoff for AT&T is an increase in data consumption by its customers. Data is the core margin driver for its wireless segment.
But don’t overlook AT&T’s broadband operations. It’s made sizable investments in mid-band 5G spectrum that it’s using to upgrade download speeds for businesses and residential households. AT&T Fiber has added at least 1 million net broadband subscribers annually for five years running. Broadband is an important dangling carrot that encourages customers to bundle their services.
As I’ve previously opined, AT&T’s balance sheet is also noticeably more flexible following the spin-off of WarnerMedia in April 2022. When WarnerMedia merged with Discovery to create Warner Bros. Discovery, the new media entity took responsibility for certain debt lots previously held by AT&T.
AT&T stock looks to have a relatively safe floor at just 8 times Wall Street’s forecast earnings for 2023 and 2024.
Innovative Industrial Properties: 10.18% yield
A second surefire, high-yield dividend stock that would be well-positioned if the U.S. were to fall into a mild recession is cannabis-focused real estate investment trust (REIT) Innovative Industrial Properties (IIPR). IIP, as the company is better known, has a 10.2% yield and has grown its quarterly payout by 1,100% since 2017.
IIP is like any other REIT in that it wants to purchase assets that can be leased for extensive periods. The only key difference is that IIP is focused on buying and leasing medical marijuana cultivation and processing facilities in legalized states. As of the end of 2022, its portfolio consisted of 110 properties that spanned 8.7 million square feet of rentable space in 19 legalized states.
If there’s a prevailing reason to own IIP stock, it’s the relative predictability of the REIT operating model. With inflationary annual rental increases and property management fees built into its long-term contracts with tenants, operating cash flow should be easy to forecast.
However, Innovative Industrial Properties has recently had an issue with delinquencies. Following years of pristine on-time collections, the company brought in just 92% of its rents on time in February. While this isn’t ideal, delinquencies are something all REITs eventually deal with. Updates from the company on these leases, which includes the possibility of asset sales, reworked master lease agreements, or delinquent leases shifted to other multistate operators, signal that this should be a fairly short-term concern.
Another reason investors can trust Innovative Industrial Properties is the way it structures its leases. Its entire portfolio is triple-net leased (also known as NNN leased). NNN leases require the tenant to cover all property expenses, including property taxes, insurance, and maintenance, on top of utilities. The advantage of NNN leases for IIP is that they remove most unexpected expenses from the equation.
Lastly, cannabis is often viewed as a nondiscretionary good. No matter how poorly the U.S. economy performs or how high inflation rises, consumers are still going to buy pot products. This suggests demand for cannabis cultivation and processing won’t be declining anytime soon.
Walgreens Boots Alliance: 5.44% yield
The third surefire, high-yield dividend stock to buy right now, even with the Federal Reserve forecasting a recession for the latter half of this year, is pharmacy chain Walgreens Boots Alliance (WBA). Despite having the “lowest” yield on this list at 5.44%, Walgreens has one of the safest payouts on the planet. The company’s base annual dividend has grown in each of the past 47 years.
Healthcare stocks are often a really smart place to put money to work during a recession. Since we can’t control what ailment(s) we develop or when we become ill, demand for everything from healthcare services to prescription medicines is consistent from year to year. Although the COVID-19 pandemic threw the physical store-reliant Walgreens for a loop in 2020, the issues the company contended with look to be firmly in the rearview mirror.
One of the most interesting aspects of Walgreens Boots Alliance is the company’s newfound focus on healthcare services. After years of horizontal growth (i.e., adding new stores), management has taken the leap into new verticals.
It’s become a majority investor in health-clinic operator VillageMD. The duo has opened 210 physician-staffed health clinics co-located in Walgreens’ stores through Feb. 28, 2023. Since these are full-service clinics, they’re designed to draw repeat visitors. Walgreens is aiming to have 1,000 of these co-located VillageMD clinics open by the end of 2027.
We’re also witnessing a concerted effort by management to invest in digital initiatives that’ll improve operating margins and the company’s organic growth rate. Walgreens has beefed up its online website, promoted drive-thru pickup, and completely reworked its supply chain in the wake of the COVID-19 pandemic.
Walgreens’ balance sheet has improved, too. The company sold its wholesale drug business to AmerisourceBergen for $6.5 billion and used a portion of this capital to reduce its outstanding debt. Walgreens shed more than $2 billion in annual operating expenses as well.
Though it could take a few years for its healthcare-services shift and digitization push to really pay off, Walgreens Boots Alliance stock offers a favorable risk-versus-reward at just 7 times Wall Street’s forecast earnings in fiscal 2024.
— Sean Williams
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Source: The Motley Fool