For the past few months, Wall Street and the investing community have been reminded that stocks can go down, too.
Following the strongest bounce back from a bear market bottom in history, all three major US indexes are, once again, in correction territory. The 125-year-old Dow Jones Industrial Average and benchmark S&P 500 are lower by more than 10%, while the growth-dependent Nasdaq Composite has entered a bear market (ie, a decline of at least 20%).
While the velocity of stock market declines can be scary at times, especially for the more-volatile Nasdaq Composite, history has shown time and again that buying high-quality stocks during corrections and bear markets is a smart move. After all, every notable decline in the market throughout history has eventually been put into the back seat by a bull market rally.
The big question is: Which stocks to buy on the dip?
High-yield income stocks can be your golden ticket to riches
Last week, I offered my take on a trio of growth stocks that looked ripe for the picking. This week I’ll turn your attention to three high-yield dividend stocks (ie yields 4% or above) you’ll regret not buying on the dip.
Why dividend stocks? The simple answer is that they have a rich history of outperforming companies that don’t pay dividends. Even though recency bias would lead most people to believe that growth stocks are a superior choice to dividend stocks, longer-term data has shown the opposite to be true.
A 2013 report from JP Morgan Asset Management (a division of JPMorgan Chase) compared the performance of stocks that initiated and grew their payouts over four decades (1972-2012) to stocks that didn’t pay a dividend. The end result was an average annual gain of 9.5% for the dividend stocks and a meager 1.6% average annual gain for those that didn’t pay dividends.
Because dividend stocks are often profitable, time-tested, and have transparent long-term outlooks, they’re just the type of companies we’d expect to increase in value over time.
With the Nasdaq firmly in a bear market, this high-yield dividend stock trio is begging to be bought.
Walgreens Boots Alliance: 4% yield
The first high-yield income stock you’ll be kicking yourself for not buying on this bear market dip is pharmacy chain Walgreens Boots Alliance (WBA 1.57% ). Shares of the company have declined as much as 20% from their early-year high.
In general, healthcare stocks are a smart place to put your cash to work during uncertain times. Since we can’t control when we get sick or what ailment (s) we develop, there’s always a steady demand for prescription drugs, medical devices, and healthcare services.
But in Walgreens’ case, the company was hurt by slower foot traffic into its stores from the pandemic. With lockdowns seemingly a thing of the past and most of the country on a path to a full reopening, the chain’s temporary underperformance is your opportunity to score a great deal on a proven moneymaker.
As a Walgreens Boots Alliance shareholder, I’ve been impressed with management’s multipoint turnaround strategy that emphasizes higher margins and generating repeat business. The company has shaved more than $ 2 billion off its annual operating expenses a full year ahead of schedule. At the same time, it’s also investing aggressively in digitization. By promoting direct-to-consumer sales, Walgreen’s should be able to sustainably lift its organic growth.
But what might be most exciting is Walgreens’ partnership with, and investment in, VillageMD. The duo has already opened dozens of full-service clinics and plans to have more than 600 clinics in over 30 US markets by 2025. Offering physician-staffed clinics should draw repeat customers who become regulars at the company’s higher-margin pharmacy.
With a 4% yield and valued at less than 10 times Wall Street’s forecast earnings for fiscal 2022, Walgreens looks like a no-brainer buy.
Sabra Health Care REIT: 8.7% yield
Speaking of no-brainer opportunities, income investors are likely to regret not snapping up shares of healthcare real estate investment trust (REIT) Sabra Health Care REIT (SBRA 0.53% ). Shares of the company have declined more than 27% from their 52-week high.
As you might imagine, a company that owns over 400 combined skilled-nursing and senior-housing facilities hasn’t fared well during the pandemic. Senior citizens have proved particularly vulnerable to COVID-19, which sent occupancy rates in the facilities owned by Sabra Health Care way down in 2020. In turn, this raised the prospect of the company not collecting rent on time, or at all, from its tenants.
However, things have improved dramatically for the company over the past 15 months. Occupancy rates for the company’s facilities bottomed out more than a year ago. What’s more, the company noted in its year-end operating results that through January 2022, it has collected 99.6% of expected rents since the pandemic began.
Another gray cloud was recently removed with the announcement of an amended master lease agreement with Avalere. It operates 27 of Sabra’s facilities, and it’s the one key tenant that’s been hit really hard by the pandemic. The new agreement gives Avalere more room to make its rental payments, as well as offers Sabra the ability to net higher future monthly payments if Avalere’s operations boom. The key point being that Avalere is no longer a concern for Sabra or its investors.
With the US learning to live with and manage COVID, the investment focus can once again turn to an aging baby boomer population. Sabra appears perfectly positioned to continue making investments to take advantage of boomers’ future needs for senior housing facilities and skilled nursing care. In short, this is an 8.7% -yielding stock you don’t want to pass up.
AGNC Investment Corp .: 11.2% yield
A third high-yield dividend stock you’ll regret not buying on the dip with the Nasdaq pushing into bear market territory is AGNC Investment Corp. (AGNC -3.42% ). AGNC has averaged a double-digit yield in 12 of the past 13 years and is one of the most-popular income stocks that pays its dividend monthly.
AGNC is a mortgage REIT. While the products mortgage REITs buy can be somewhat complex, the gist of the company’s operating model is that it’s looking to borrow money at low short-term rates that it can use to purchase higher-yielding long-term assets, such as mortgage-backed securities (MBS). The wider the gap (known as net interest margin) between the average yield AGNC nets from an MBS and what it pays on its short-term borrowing, the more profitable the company can be.
At the moment, AGNC is facing a bit of an unfavorable scenario. Since mortgage REITs tend to be highly interest-sensitive, the flattening yield curve (ie, the shrinking of the yield gap between short-term and long-term Treasury yields) is likely to weigh down its net interest margin in the coming quarters.
However, there are two important things for investors to recognize. First, the yield curve spends far more time steepening than flattening, which bodes well for patient investors in AGNC. Second, the Federal Reserve raising rates should actually lift the yield AGNC nets from the MBS it buys over the long run.
Also, take note that AGNC Investment almost exclusively purchases agency assets. An agency security is backed by the federal government in the event of default. This added protection is what allows the company to prudently use leverage to increase its profits.
The rule of thumb with mortgage REITs is that they typically stay close to their book value. With AGNC’s shares changing hands at 18% below their tangible book value, now looks like the perfect time for opportunistic investors to strike.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.