September is historically the worst month for stocks, and in the 2022 bear market, bargain hunters aren't being disappointed.

In the last month, the S&P is down 10%, the Nasdaq 13%, but defensive high-yield blue-chips are down just 7%, and defensive sectors like utilities less than 5%.

Now long-time readers of mine will know that I'm a big advocate for blue-chip bargain hunting in a bear market. That's because history is very clear that while none of us knows when the market will bottom, it will eventually recover.

The more severe the sell-off the larger the future gains, including an average 281% 10-year return for stocks following the average 18+% six-month bear market.

But to enjoy those kinds of incredible returns first, you have to survive the bear market, which might have further to fall.

For over a decade "don't fight the Fed" has been the battle cry of the TINA (there is no alternative)/momentum-chasing crowd. Low inflation allowed the Fed to pivot quickly when economic growth was threatened, such as in late 2018, setting us up for a glorious 31% 2019 rally.

And of course, we can't forget the QE infinity following the Pandemic resulted in the greatest year for stocks in history, a 100% rally off the March 23rd, 2020 lows.

But that was in a low inflation world, a mirror image of the high inflation world we now find ourselves in.

The hottest inflation in 41 years and a Volker-style Fed have the bond market expecting:

Since 1954 the Fed has never stopped hiking until the Fed funds rate was above core PCE, its official inflation metric.

According to the Cleveland Fed's inflation model, in September's PCE report (for August) core PCE is expected to come in at 4.7%. Next month it's expected to come in at 4.8%.

It doesn't take a math genius to see that core inflation is moving in the wrong direction. Why?

Because the largest component of core inflation, about 33%, is housing, and how the government measures housing inflation involves a six-month lag to actual rental or housing prices.

According to Morgan Stanley, US housing inflation will likely peak in January.

Moody's, the 2nd most accurate economist according to Bloomberg, agrees, thinking January to March will see a peak in both housing inflation and core inflation.

What does that potentially mean?

This sticky core inflation is why Deutsche Bank (another blue-chip economist team, along with Morgan Stanley and Moody's) thinks the Fed might hike all the way to 5% by May 2023.

This is in-line with Minneapolis Fed President Kashakari who for six months has been saying the Fed will have to hike to 4% to 5% and then keep rates that high for 12 to 24 months.

The good news is that stocks aren't likely to keep falling due to rising rates this entire time.

The bad news is that slowing economic growth and earnings growth will give stocks a new reason to fall.

Goldman Sachs (another blue-chip economist team) thinks EPS next year will fall 11%; thus, stocks won't likely bottom until -35% from record highs.

A 35% peak decline for stocks would be 100% historically normal for recessionary bear markets.

I know the idea of stocks falling another 20% or so might seem terrifying, a true market hell. Especially if bonds keep falling too, creating more pain for balanced portfolios (like a 60/40).

The good news is that the blue-chip economist consensus thinks long-term yields are close to peaking.

This means that while stocks might potentially have 20% more to fall, bonds are likely to start acting defensively soon.

As soon as recession overtakes inflation fears, blue-chip economists like Deutsche Bank and HSBC think that 10-year yields will start falling.

While a 60/40 isn't going to go up in a 20% bear market, it will also fall a lot less than the market, and those hedging with long bonds could see a very smooth ride down.

Another option for those sweating the recent market declines is defensive high-yield blue-chips.

Dividend Kings Zen Research Terminal

Dividend Kings Zen Research Terminal

You can sort and screen the Dividend Kings Zen Research Terminal not just by fundamental metrics like safety, quality, yield, and volatility but also by daily, monthly, and year-to-date returns.

This is how you can easily find high-yield, low volatility blue-chips that are acting defensively in the last month and during the entire bear market.

So let me show you why British American Tobacco (BTI), and Novartis (NVS), are two high-yield low volatility bear market blue-chip bargains that might be just what you need right now.

Let me show you why BTI and NVS might be just what you need to ride out this bear market in safety and relative comfort while delivering solid market-beating returns for years or even decades to come.

Back in 2017, BTI was 50% historically overvalued (just like the S&P was in March 2000).

It was priced as if nothing scary would ever happen again, but we know what came next.

But guess what? From 50% overvalued in mid-2017, BTI became 50% undervalued just a year later.

De-leveraging is now complete, and BTI has resumed buybacks at some of the best valuations in 20 years.

More importantly, BTI's plans for a 100% tobacco-free future is going exceptionally well.

Reduced-risk products like vaping, heat-sticks, and oral nicotine pouches, are growing at 50%.

BTI also has 13 private equity investments in cannabis companies because it plans to sell only reduced-risk nicotine and cannabis in the future.

21% CAGR (4X better than the S&P 500)

(Source: Dividend Kings Zen Research Terminal)

BTI is trading at 8.4X cash-adjusted earnings, an anti-bubble valuation pricing in -0.2% growth. That's compared to management's guidance of 7% to 9% CAGR and the median consensus of 10.2% CAGR.

British American 2024 Consensus Return Potential

British American 2027 Consensus Return Potential

If BTI grows as expected and returns to historical fair value, it could double by 2024 and nearly triple by 2027.

Now compare that to the S&P 500 consensus.

S&P 500 2027 Consensus Total Return Potential

Inflation And Risk-Adjusted Expected Returns

(Source: DK S&P 500 Valuation & Total Return Tool)

Over the next five years, analysts expect 9% annual returns from the S&P 500.

Analysts think BTI will deliver 45% total returns in the next year, and its fundamentals justify up to a 75% gain.

10-Year Inflation And Risk-Adjusted Expected Return

(Source: Dividend Kings Research Terminal, Morningstar, FactSet, Ycharts)

Analysts now think BTI could deliver almost 18% CAGR Buffett-like returns, not just for a few years, but potentially for decades to come.

That's similar to BTI's average annual return over the last 37 years. Management's 15.5% CAGR total return guidance is similar to the average 15-year return over the last four decades.

(Source: DK Research Terminal, FactSet)

Even if BTI never regains its historical 13 to 14 PE ratio, as long as it grows as expected, investors could earn life-changing income and wealth.

(Source: DK Research Terminal, FactSet)

How does 6X the aristocrat's returns and almost 8X more than the S&P 500 strike you? From today's 40% discount to fair value, that's what analysts think BTI potentially offers.

DK (Source: Dividend Kings Automated Investment Decision Tool)

(Source: Dividend Kings Automated Investment Decision Tool)

BTI is one of the best defensive ultra-high-yield options for anyone comfortable with its risk profile.

With strong positions in multiple key therapeutic areas, Novartis is well positioned for steady long-term growth. Strong intellectual property supporting multibillion-dollar products, combined with an abundance of late-pipeline products, creates a wide economic moat...

Novartis differentiates itself by its sheer number of blockbusters, including Entresto for heart failure and Cosentyx for immunology diseases. Also, it has generated a strong late-stage pipeline with recent launches of migraine drug Aimovig and cancer drug Kisqali. - Morningstar

NVS has a proven track record of risk management and bringing blockbusters to market. It operates in almost 200 countries and knows how to deal with national health systems and regulatory regimes of all kinds.

NVS isn't a growth dynamo like Merck (MRK), but analysts do think it will grow more than 50% faster than the pharma industry over time, on par with such Ultra SWAN Pharmas as Amgen (AMGN) and about 1% faster than JNJ (5.4% growth consensus).

14% CAGR (2X better than the S&P 500)

(Source: Dividend Kings Zen Research Terminal)

If NVS grows as expected and returns to historical fair value, it could double in the next five years.

In the next year alone, analysts expect a 20% gain from NVS though at a 25% historical discount, just 11X cash-adjusted earnings, NVS's fundamentals justify up to a 38% gain.

10-Year Inflation And Risk-Adjusted Expected Return

(Source: Dividend Kings Research Terminal, Morningstar, FactSet, Ycharts)

Analysts expect market-beating returns from NVS in the future, and in the meantime, you get a very safe 4.2% yield that's superior to most high-yield options, including high-yield blue-chip ETFs.

Slightly better returns than the market, but with superior yield and lower volatility, is what NVS has been delivering for the last 26 years.

(Source: DK Research Terminal, FactSet)

NVS might not have sexy growth, but it has relatively steady and dependable growth that could deliver nearly 11X inflation-adjusted returns over the next 30 years.

(Source: DK Research Terminal, FactSet)

That's pretty much on par with what analysts expect from the aristocrats and S&P, but with NVS, you get a very safe 4.2% yield on day one.

DK (Source: Dividend Kings Automated Investment Decision Tool)

(Source: Dividend Kings Automated Investment Decision Tool)

NVS is one of the best defensive global aristocrat options for anyone comfortable with its risk profile.

I know it might feel like hell for anyone who can't tear their eyes from the market these days (which is pretty much everyone reading this on Seeking Alpha;)

When stocks fall 10% in a month and might have 20% more to fall before bottoming, it's tempting to want to time the market and just go 100% cash and ride out the storm. But history is very clear about this. 98% of market timers fail, and the cost of such failure can be enormous.

The greatest investors in history aren't market timers; the average retail investor is. The greatest investors in history are billionaires; the average retail investor underperformed the market by 67% over the last 20 years.

It might seem counter-intuitive or even crazy. But it's 100% true. Time in the market, not timing the market, is the easiest and safest road to riches you can travel.

This is where high-yield, defensive low volatility blue-chips like BTI and NVS can help.

No, they aren't likely to go up if the market falls that final 20% that Goldman and the blue-chip consensus expect. But they are likely to fall a lot less.

BTI and NVS are down about half as much during a ghastly month for stocks. No, they aren't up; nothing except managed futures is doing well in the current stagflationary environment.

But for those who aren't comfortable with hedge funds or who already own them and are looking for defensive high-yield stocks, world-beaters like BTI and NVS are a great options right now.

Cash is defensive right now and feels oh so good to have. But do you know what cash won't help you do long-term? Retire in safety and splendor.

But do you know what will? Defensive low volatility high-yield blue-chip bargains like these, which are just begging to be bought right now.

The purpose of the margin of safety is to render the forecast unnecessary. - Ben Graham

When you focus on safety and quality first, and prudent valuation, and sound risk-management always, you never have to pray for luck; you'll make your own.

Dividend Kings helps you determine the best safe dividend stocks to buy via our Automated Investment Decision Tool, Zen Research Terminal, Correction Planning Tool, and Daily Blue-Chip Deal Videos.

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This article was written by

Adam Galas is a co-founder of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 5,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.

The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha).

I'm a proud Army veteran and have seven years of experience as an analyst/investment writer for Dividend Kings, iREIT, The Intelligent Dividend Investor, The Motley Fool, Simply Safe Dividends, Seeking Alpha, and the Adam Mesh Trading Group. I'm proud to be one of the founders of The Dividend Kings, joining forces with Brad Thomas, Chuck Carnevale, and other leading income writers to offer the best premium service on Seeking Alpha's Market Place.

My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives.

With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and safe and dependable income streams in all economic and market conditions.

Disclosure: I/we have a beneficial long position in the shares of NVS, BTI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dividend Kings owns NVS and BTI in our portfolios.