Whether you’re ready for it or not, stock market volatility is back in a big way. Following an exceptionally strong bounce back rally from the March 2020 pandemic-induced bear market, both the broad-based S&P 500 and growth stock-dependent Nasdaq Composite have declined by a double-digit percentage from their respective all-time highs.
The speed by which stocks decline during corrections can, at times, be unnerving. However, history has shown time and again that crashes and corrections are always an ideal time to put money to work in high-quality businesses.
Understandably, not every investor has the same risk tolerance. But that doesn’t mean there aren’t great deals to be had for conservative investors. If you have $500 ready to put to work right now, which won’t be needed to pay bills or cover emergencies, here are three of the safest stocks to buy as the market corrects lower.
Brand-name companies that provide a basic necessity product or service are often a smart place to put your money to work if you’re worried about volatility or putting a significant chunk of your initial investment at risk. Telecom stock AT&T (NYSE: T) is one such safe stock that could be worthy of a $500 investment right now.
AT&T’s bread-and-butter segment has long been its wireless operations. Although the growth heyday for stalwart telecom stocks is now in the rearview mirror, AT&T does have one heck of an opportunity to generate modest organic growth from the rollout of 5G infrastructure.
Upgrading wireless infrastructure won’t be cheap, and it’s not going to happen overnight. But given that wireless download speeds haven’t been improved in about a decade, 5G offers a dangling carrot that should entice businesses and consumers to upgrade their devices for years to come. Since this segment generates its highest margins from data consumption, 5G is the organic growth shot in the arm AT&T has been looking for over the past couple of years.
AT&T is also in the midst of a business transformation that’s designed to improve its balance sheet and could very well unlock shareholder value. In the coming months, the company is going to spin-off content arm WarnerMedia and merge it with Discovery to create a new media entity. This beefed-up media company should be able to save over $3 billion annually from cost synergies, and it’ll have in the neighborhood of 94 million streaming subscribers (based on pro forma figures).
Jettisoning WarnerMedia will allow AT&T to focus on its 5G wireless services and debt reduction. Even though AT&T will be roughly halving its dividend when this spin-off takes place, it’ll still be paying out well over a 4% yield. Plus, investors will have a stake in the newly minted WarnerMedia-Discovery.
AT&T is quite inexpensive at less than 8 times Wall Street’s forecast earnings for 2022, and it’s far less volatile than the S&P 500. It checks all the appropriate boxes for conservative value and income investors.
Another one of the safest stocks investors can confidently buy with $500 during this stock market sell-off is conglomerate Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B).
Despite being one of the largest publicly traded companies in the U.S., Berkshire isn’t exactly a household name. Thankfully, its CEO is: Warren Buffett.
The Oracle of Omaha, as Buffett has come to be known, has a long history of outperformance. While even the greatest investors are fallible, Buffett’s 57-year tenure as CEO has resulted in average annual gains for Berkshire’s Class A shares (BRK.A) of more than 20%. Put another way, Buffett has overseen more than $685 billion in value creation and an aggregate gain of over 3,700,000% since taking the reins.
One reason Berkshire Hathaway makes for such a safe investment is its penchant for investing in and acquiring cyclical businesses. A “cyclical” company does well when the U.S. and global economy are expanding and struggles when economic contractions or recessions arise. Buffett is well aware that recessions are an inevitable part of the economic cycle. But he also knows that periods of economic expansion last significantly longer than recessions. In other words, Berkshire Hathaway’s portfolio is perfectly positioned to take advantage of U.S. and global economic growth over time.
The Oracle of Omaha and his investing team also love dividend stocks. This year, Berkshire Hathaway is on pace to collect over $5 billion in dividend income (including preferred stock payouts), which works out to about a 5% yield on cost. Companies that pay a dividend are often profitable on a recurring basis, time-tested, and have transparent long-term growth outlooks.
Investors should also appreciate that Warren Buffett and right-hand man Charlie Munger have had an insatiable appetite for repurchasing shares of their own company’s stock. Between June 30, 2018 and Sept. 30, 2021, Buffett and Munger have approved the repurchase of $51 billion in Class A (BRK.A) and Class B (BRK.B) shares. Having fewer shares outstanding can lift a company’s earnings per share and make it more fundamentally attractive.
A third safe stock that would make for a smart buy with $500 as the stock market sells off is the nation’s largest electric utility by market cap, NextEra Energy (NYSE: NEE).
Utility stocks like NextEra are the true definition of a basic need product or service. If you own a home or rent a property, you almost certainly need electricity or natural gas to power your home and appliances. Demand for electricity doesn’t tend to ebb and flow all that much from one year to the next since it’s a necessity service. This makes electric utility cash flow quite predictable — and Wall Street loves predictability.
What makes NextEra Energy so intriguing is the company’s incredible focus on renewable energy assets. No electric utility in the country is generating more capacity from wind or solar than NextEra. Further, with the company spending an aggregate of $50 billion to $55 billion on new infrastructure projects between 2020 and 2022, it’s unlikely that any other utility is going to take this green-energy crown anytime soon.
Although investing in solar and wind projects has been costly, NextEra has been able to take advantage of historically low lending rate to finance its clean-energy ventures. These projects are also notably reducing the company’s electricity generation costs. That’s resulted in a sustained growth rate in the high single digits for more than a decade. By comparison, most electric utilities are growing by a low single-digit percentage.
In addition to its leading renewable energy capacity, NextEra’s regulated utility operations (i.e., those not powered by wind or solar) serve a key purpose. Even though the company can’t raise rates without the approval of state public utility commissions, this regulation also ensures that it avoids being exposed to potentially volatile wholesale electricity pricing. In short, its regulated operations add to the company’s cash flow transparency.
NextEra Energy is a low-volatility stock with an over 2% yield that’s delivered a positive total return to its shareholders in 19 of the past 20 years. It’s an ideal safe stock for conservative investors.
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Sean Williams owns AT&T. The Motley Fool owns and recommends Berkshire Hathaway (B shares) and NextEra Energy. The Motley Fool recommends Discovery (C shares) and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.