Cheap Dividend Stocks to Buy Amid a Possible U.S. Recession

Dividend stocks tend to do well in a rising rate environment. What are the best cheap dividend stocks for investors to consider amid a possible recession?

Mohit Oberoi, CFA - Author

Jul. 26 2022, Published 10:27 a.m. ET

The fears about a U.S. recession have been rising even though President Joe Biden and Treasury Secretary Janet Yellen have sought to downplay the risks multiple times. While stocks tend to fall in a recession, dividend stocks can outperform. Also, cheap undervalued stocks tend to do well in a rising rate environment. What are the best cheap dividend stocks to consider in 2022?

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Despite recession fears and all the noise about a slowdown and inflation, U.S. companies are expected to pay record dividends in 2022. Here it's worth noting that, unlike interest payments, dividends aren't contractual payments and companies can cut or suspend them all together in a slowdown. Some of the companies that suspended dividends in 2020 amid the COVID-19 pandemic haven't restored them yet.

Cheap dividend stocks outperform in a recession — here's why.

During a recession, investors seek solace in companies with a high and stable dividend yield as stocks fall. While the capital gains on stocks depend on the price action, the dividend is much more stable, especially for companies whose business isn't impacted by economic cycles. Similarly, cheap stocks have room to fall much less than their growth peers which start to look even more overvalued in a recessionary environment.

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Investing in cheap dividend stocks can be a good strategy if you want to position your portfolio for a possible recession. Here are the three cheap dividend stocks that you can consider in 2022.

  • AT&T (NYSE: T)
  • Citigroup (NYSE: C)
  • Ford (NYSE: F)
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AT&T faces headwinds but its dividend looks safe for now.

AT&T stock has been a wealth destructor and has lost half of its market cap over the last five years. The company recently revised its 2022 free cash flow guidance within a span of four months. Despite the toned-down guidance, its dividend looks stable and fat with a yield of almost 6 percent. The stock’s valuations are also reasonable with an NTM (next-12 month) PE multiple of 7.6x.

The stock’s valuations are low for a reason, which includes its high debt load and sagging growth. However, AT&T remains among the best cheap dividend stocks to ride a possible U.S. recession.

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Citigroup is another cheap dividend stocks that Warren Buffett also likes.

While the second-quarter earnings of U.S. banks were mixed, Citigroup’s earnings and the post-earnings price action stood out. Thanks to the post-earnings rally, C stock has bridged its YTD losses to just about 14 percent and is outperforming banking peers.

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citigroup stock valuation

Citigroup has a dividend yield of 3.9 percent, which is higher than most banks. At the same time, its NTM PE of 7.6x is lower than its peers. The stock also trades below the book value which is another sign of its undervaluation. Famed value investor Warren Buffett bought Citigroup shares in the first quarter of 2022, and Berkshire Hathaway was the company's fourth-largest stockholder at the end of March.

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Ford isn't recession proof but it's a cheap dividend play.

Ford suspended its dividend in 2020 but restored it last year even though peer General Motors hasn't restored its dividend. Ford has a dividend yield of 3.1 percent, which is higher than that of the S&P 500. It trades at an NTM PE of 6.5x, which looks quite attractive, especially given the company’s aggressive pivot towards electric cars.

While Ford isn't a recession-proof stock, its valuations seem to factor in a sharp slowdown in earnings. The company’s dividend looks safe unless we enter into a deep and prolonged recession.


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