THE BEST HIGH-YIELD DIVIDEND STOCKS FOR 2023 FINDING VALUE ...

THE BEST HIGH-YIELD DIVIDEND STOCKS FOR 2023

FINDING VALUE AND RETURNS IN

A NO-GROWTH ENVIRONMENT

Written by Thomas Hughes ? Brought to you by

THE BEST HIGH-YIELD DIVIDEND STOCKS FOR 2023

Finding Value and Returns in a No-Growth Environment

CONTENTS 1. Quality Dividend Stocks Never Go Out of Style 2. What is a Good Dividend Yield? 3. The 10 Best High-Yield Dividend Stocks for 2023 4. Chevron: Windfall Profits Drive Capital Returns 5. Exxon Mobil: An Industry Leader to Help Reduce Volatility 6. Lowe's Companies: A Stock Built on a Strong Foundation 7. Medtronic: The Aging of America Gives Medtronic a Firm Floor 8. AbbVie: A Strong Value Stock in a Volatile Sector 9. JPMorgan Chase: Best in Class as Interest Rates Rise 10. Duke Energy Corporation: A Traditional Utility Packing Plenty of Punch 11. NextEra Energy Partners: Committed to Clean Energy 12. Camping World: Supplying America's Outdoor Enthusiasts 13. V.F. Corporation: A High-Yield Dividend King with a Nice Fit

Quality Dividend Stocks Never Go Out of Style

Dividend stocks are stocks issued by companies that regularly redistribute a portion of their profits to shareholders. This dividend is usually paid in cash, although sometimes it can be issued as additional shares of stock. Dividends are typically issued quarterly and are a driving force for investors. Quality dividend stocks, those you can count on quarterly and year after year, are relatively easy to find.

Generally, companies able and willing to pay dividends have mature business models with strong fundamentals that start with solid balance sheets. The stocks, classified as blue chip stocks, have reliable performance in both good and bad economic conditions. However, the "best of breed" among these companies actively seek to increase the value of their stock and their dividends, and they can do this through reinvestment and dividend growth.

Reliable dividend payers, specifically dividend growth stocks, are essential for a portfolio because they can reduce volatility. Dividend-growing companies attract buy-and-hold investors who don't sell at the first sign of trouble and rarely have knee-jerk reactions to market developments.

WHY DIVIDEND STOCKS?

Although no stocks carry zero risk, dividend stocks represent a safer way for investors to invest their wealth. Compared to bonds, dividend stocks have delivered higher (non-risk adjusted) returns than bonds during all meaningful periods. For example, the 10-year U.S. Treasury bond yields about 3.5%. But many high-quality dividend stocks have even higher dividend yields.

Understanding Dividend Yield

A dividend yield is a company's dividend expressed as a percentage of its stock price. Yield is significant because it is a measure of investor return. A higher yield is usually better than a lower one, but that's relative to the company and the portfolio goals. To calculate dividend yield, use the following formula:

Dividend yield = Current annual dividend (per share)/Current stock price

Let's look at a couple of examples:

The Coca-Cola Company (NYSE: KO) pays a total annual dividend of $1.76 per share. Assuming its stock price the day it declares its dividend is $61, its dividend yield is:

1.76/61 = .0288, or 2.88%

Abbott Laboratories Inc. (NYSE: ABT) pays a total annual dividend of $2.04 per share. Assuming its stock price on the day it declares its dividend was $118, its dividend yield is:

2.04/118 = 0.0172 or 1.72%

Just as a company's stock price fluctuates, its total annual dividend can also change, although this change is less frequent and usually more predictable. When a company issues its quarterly earnings report (as all dividend-paying companies are obligated to do), management will provide insight to analysts about the company's intention regarding the dividend payout.

Stocks with a history of dividend increases can increase their payments again. Companies like to do this because it attracts buy-and-hold investors and can help support the stock price and reduce volatility. Companies are reluctant to suspend or cut their distributions, even if they need to preserve capital, because it can have a detrimental effect on the stock price.

What is a Good Dividend Yield?

What would be considered a good dividend yield? If you look at the two examples above, it depends. If you own the same shares in each company, you will make more dividend income from Abbott Labs. However, if you own more shares of Coca-Cola than Abbott, you'll likely make more dividend income with that stock. The real question is how the dividend compares to its industry peers and how it fits into the portfolio. As a rule of thumb, a dividend percentage higher than the S&P 500 average is a good one, and it's better if it is a safe and reliable payment. A high yield is well above the broad market or industry peers, depending on the strategy. Regarding the S&P 500, a high yield is above 3%, and in 2023, some yields push 5% and even higher, which you can consider reliable if not growing. Two groups of stocks that offer safe and reliable payments are the Dividend Aristocrats and Dividend Kings. The Dividend Aristocrats are S&P 500 stocks that have increased dividend payments for at least 25 years. The Dividend Kings have increased theirs for at least 50 years. These companies have proven their ability to pay and increase their dividend year after year for decades, and you can rely on them to continue doing so. The icing on the cake is that in 2023, a few Dividend Kings and Aristocrats can be called "high yield."

How to Avoid Yield Traps

High yield is not without its risks. There are quite a few ways that high yields can trap investors, so be cautious. Among these are actively managed funds or other investments that return capital and companies that cannot sustain their payments. In the first case, you can find this information in the company's investor information, which you can see in the stock price. The stock price of these companies tends to trend lower because of the return of capital (ROC), which means the company is returning money to shareholders it didn't earn. The company should keep it in its accounts for reinvesting. Instead, the return will whittle away shareholder equity. You should heed a high yield, but how do you know when it's bad? The first check is to see what the payout ratio is. If the company pays out a large number of earnings or, worse, all or more than earnings, it is a red flag. The next check is the earnings and earnings outlook. Is the company earning the expected money? The final checks are the balance sheet and the investment community. If the company isn't holding excessive amounts of debt and has good leverage and coverage ratio, the yield may be sustainable.

The 10 Best High-Yield Dividend Stocks for 2023

Investors can find dividend stocks in almost any sector of the market, even tech. Tech stocks are not typically known for paying a dividend because they are usually growth stocks, but some techs are blue-chip quality that pay dividends. Microsoft Inc. (NASDAQ: MSFT) and Apple Inc. (NASDAQ: AAPL) have been long-time dividend payers. The point is that investors can build a dividend portfolio and even a high-yield-focused dividend portfolio based on any sector and just about any industry. However, some sectors, such as the energy sector, pay higher-than-average yields.

Chevron Corporation (NYSE: CVX): Windfall Profits Drive Capital Returns

Chevron Corporation isn't yielding the 4.25% it was in early 2022, but it still yields more than 3%. It comes with a healthy outlook for distribution growth. The company has increased its payment for the last 36 years, and there is no reason to think it won't keep rising for the next 36. Oil prices have fallen from their peak above $125, but they are still trending well above their pre-pandemic levels and at levels that could be considered "windfall" levels. Chevron's earnings over the past year have shown substantial growth, and this strength should continue. While earnings may subside from the lofty levels of 2022, 2023 will still see some growth, and there is upside risk in the outlook. The supply/demand outlook for oil supports the price. Assuming the global economy doesn't crash due to FOMC tightening, there will be a recovery starting in late 2023 or early 2024 when they begin to loosen policy. In this scenario, oil demand will increase and drive energy sector profits to record levels. Until then, Chevron pays out only 32% of its earnings, which is very low. It helps them sustain dividend increases regardless of oil price direction and may result in a windfall distribution or share repurchases as the cash balance grows.

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