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Safe Dividend Stocks for Investors Amid the Bear Market Rally

Mohit Oberoi, CFA - Author
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Jun. 24 2022, Published 9:57 a.m. ET

The Nasdaq has been in a bear market for some time now and the S&P 500 entered a bear market earlier in June. While U.S. stocks have rebounded from their lows, many see it as a typical bear market rally. Dividend stocks can be a good investment in the current environment. Here are some of the safe dividend stocks to consider in 2022.

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First, we should understand that unlike interest payments, which are contractual in nature, dividends aren't fixed. The company’s board decides on the dividend at a regular interval based on the company’s profits, cash flow needs, as well as the broader macro environment. As investors would recall, many companies either lowered or suspended their dividends in 2020 amid the COVID-19 pandemic.

Some companies haven't restored their dividends.

Some companies still have their dividends suspended. General Motors and Disney are two prominent names that have their dividends suspended. While Ford has resumed its dividends and its current yield is healthy at almost 3.5 percent, General Motors has decided against restoring the dividend.

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This underscores the point that if you're looking for a steady stream of dividends, you should build a diversified portfolio of dividend-paying companies. Secondly, you should pick stocks whose dividend looks relatively safer.

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How to identify safe dividend stocks

To identify safe dividend stocks, investors need to consider a few factors. First, the company should have a long history of paying stable dividends. Also, the company should have a strong balance sheet so that it can pay dividends even during short-term economic turmoil.

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The companies whose businesses aren't impacted much by recessions and economic turmoil are also generally safe dividend bets. Finally, the dividend payout ratio should be reasonable. Companies that pay most of their profits as dividends are at risk of cutting dividends if their earnings fall.

Four safe dividend stocks to buy in 2022

Pfizer, Citigroup, Verizon, and PepsiCo look like four safe dividend stocks to buy in 2022. Pfizer has a dividend yield of 3.2 percent and its dividend payout ratio is just about 40 percent.

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In the short term, Pfizer's earnings will remain buoyed, thanks to revenues from its COVID-19 vaccine as well as Paxlovid, its COVID-19 pill, which has conditional approval in many countries. In general, the pharma business is defensive, which makes Pfizer among the safest dividend stocks.

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Citigroup has a healthy dividend yield.

Citigroup has a dividend yield of 4.4 percent, which looks healthy. The company is transforming its business and is exiting several international markets, which would help free up capital. Its dividend payout ratio is also low, which makes the dividends safe. Berkshire Hathaway, whose chairman Warren Buffett has sold several bank stocks over the last two years, has also invested in Citigroup.

While bank stocks might remain under pressure amid recession fears, Citigroup’s tepid valuations make it a relatively safer bet compared to its peers.

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Verizon looks like another dividend stock worth considering.

When thinking about dividend stocks, it's hard to miss Verizon with its almost 5 percent dividend yield. The company paid over 57 percent of its GAAP earnings as dividends in the most recent quarter. While the payout ratio is on the higher side, the stable business makes Verizon a dividend stock worth considering.

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PepsiCo is a safe dividend stock in a defensive industry.

With a diversified portfolio of food and beverage products, PepsiCo looks like a good defensive stock. While its dividend payout ratio is high, that’s because of the lack of other investment avenues.

The company has increased its annual dividend to $4.6, which gives us a dividend yield of 2.8 percent. PepsiCo has a good track record of paying dividends and has progressively increased them for 50 consecutive years now.

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