Buckle up, because stock market volatility is back in a big way!
Since the beginning of the year, the benchmark S&P 500 and iconic Dow Jones Industrial Average have entered official correction territory. Both indices have lost more than 10% of their value after hitting their respective closing all-time highs in early January.
It’s been an even tougher gamble for growth-focused companies Nasdaq Composite (^IXIC 0.00%), which has lost more than 20% of its value since hitting an all-time high in mid-November. This puts the widely followed Nasdaq in a bear market.
Dividend Stocks May Be Your Ticket to Success in a Bear Market
Sure, bear markets can be scary. The speed and unpredictability of downside moves can make investors’ emotions get the best of them. But if history has shown anything, it’s that buying high-quality stocks during market downturns and holding those stocks for extended periods is a money-making strategy that works all too often.
In particular, buying dividend stocks can be your golden ticket to riches during a Nasdaq bear market.
Why Dividend Stocks? The best answer I can offer is that they have significantly outperformed their non-dividend peers over the long term. Nine years ago, JP Morgan Asset Management, a division of JPMorgan Chase, released a report comparing the average annual returns on dividend stocks for non-payers over a 40-year period (1972-2012). Dividend stocks crushed non-payers with an average annual return of 9.5% vs. 1.6%.
The fact that income stocks outperform stocks that don’t pay for long periods is not a surprise. Companies that pay a regular dividend are often recurringly profitable, time-tested, and have clear prospects for long-term growth. They are the kind of companies that should increase in value over time.
With the Nasdaq bear market weighing on virtually every sector and industry, now is the perfect time for investors to go shopping. What follows are three monster dividend stocks you’ll wish you didn’t buy in the crash.
AT&T: 5.75% yield
The first monster dividend stock that is crying out to be bought during this Nasdaq bear market crash is a company that caters to value investors: AT&T (T 1.38%).
Like most big telecom stocks, the height of AT&T’s growth is long past. With lending rates near record lows for years, investors have chosen to ignore slow-growing value games like AT&T and focus on high-growth healthcare and technology companies. But with the market down, a company like AT&T, which can generate steady operating cash flow, becomes much more attractive.
Despite years of slow growth, AT&T has two organic catalysts just around the corner. First, there is the ongoing upgrade of the wireless infrastructure to support 5G. It’s been about a decade since telecom providers significantly improved wireless download speeds. While these upgrades are expensive and time consuming, they are likely to start a multi-year device replacement cycle that leads to a steady increase in data consumption. Given that AT&T makes its heaviest margins on the data side of its wireless business, investing in 5G infrastructure should be a smart move.
The other big catalyst for AT&T is the now complete spin-off of WarnerMedia, which subsequently merged with Discovery to create an entirely new media entity, Discovery of Warner Bros.. The way this deal was structured resulted in AT&T being paid $40.4 billion in cash upon completion. With AT&T also reducing its quarterly payment, the company should have no problem making a sizeable dent in its debt load. In other words, your financial flexibility should demonstrably improve as a result of this agreement.
Returning handsomely at 5.8% and valued at less than eight times Wall Street’s forecast earnings per share, AT&T looks like a screaming buy.
Innovative Industrial Properties: 4.75% yield
Another monster dividend stock you’ll kick yourself if you don’t buy it in the fall is the cannabis-focused real estate mutual fund. Innovative Industrial Properties (IIPR -0.06%).
IIP, as the company is more commonly known, acquires cannabis cultivation and processing facilities with the intention of leasing these assets for extended periods. About two weeks ago, the company owned 108 properties spanning 8.1 million square feet in 19 states. The last time IIP reported its weighted average lease term, it was more than 16 years. This means that the company is sitting on an operating cash flow goldmine.
While the acquisition of new properties is the primary means of growth for Innovative Industrial Properties, it also has a built-in organic growth component. The company passes on inflationary rent increases each year and charges a property management fee that is tied to the base annual rental rate for each tenant.
But what has really helped IIP in recent years is the inability of the US federal government to pass cannabis banking reforms. With access to basic banking services unpredictable for marijuana stock due to the herb being a federally illicit substance, IIP has stepped in with its sale and leaseback program. IIP is acquiring properties for cash and immediately leasing them to the seller for an extended period. As long as cannabis banking reform remains blocked in Congress, IIP can clean up with sell-leaseback deals.
Innovative Industrial Properties has increased its quarterly payout by 1,067% in less than five years and is valued at just 20 times Wall Street’s projected earnings by 2023, despite projected 24% sales growth next year. That’s a bargain for growth and income seekers.
Broadcom: 2.93% performance
A third monster dividend stock you’ll wish you didn’t buy in the Nasdaq bear market crash is the semiconductor solutions company. broadcom (AVGO 3.96%).
As with AT&T, Broadcom’s biggest catalyst in the coming years will be the 5G wireless revolution. This company generates most of its revenue by producing wireless chips that are used in next-generation smartphones. As more consumers and businesses trade in older devices for smartphones capable of 5G download speeds, Broadcom will prosper. According to IDC, US 5G smartphone shipments are expected to grow from 33.4 million units in 2020 to 153.3 million in 2025.
Investors should also be excited about Broadcom’s other sales channels. For example, it provides solutions for next-generation automobiles, as well as access and connectivity chips used in data centers. The latter is a particularly intriguing growth opportunity given that companies have been moving their data to the cloud at an accelerated rate in the wake of the pandemic.
Although Broadcom is not at the same level of cash flow predictability as IIP, it benefits from a historically high order book of $14.9 billion. CEO Hock Tan noted earlier this year that his company has been booking production well into 2023. Even though semiconductors are a cyclical industry, this huge backlog should help boost Broadcom’s pricing power.
Since December 2010, Broadcom’s quarterly payout has grown (drum roll) over 5700%, not a typo! With shares valued at about 14 times a year’s earnings going forward, it seems like a bargain.