Dividend stocks solve problems in 2023 and beyond

Many individual investors tending to their portfolios are in a quandary about where to invest new cash in 2023.

Some, having the wisdom to consider buying when the market is down, may currently be on edge with a case of FOMO (fear of missing out), with expectations that the market will bob up in strong recovery early in 2023, but no idea of what to buy.

Then there are investors who are skittish from believing generalized market forecasts predicting a market slump in January, followed by single-digit gains at best for the S&P 500 in 2023. They’re scared to buy anything.

These investors might be more relaxed if they didn’t worry so much about the first few months of 2023, or even the entire year, and instead geared their expectations to horizons further in the distance — two, three or four years down the road.

By then, well-chosen stocks would likely have recovered from any damage from recession next year—if one materializes. Thus, being a true long-term investor can relieve you of the hand-wringing angst that shorter-term investors tend to suffer.

Yet, investing for the long haul requires the discipline to hang in there and resist selling when your holdings enter red ink soon after purchase, which often happens in this highly volatile market. It also requires the informed self-assurance to have confidence in your overall investment plan and avoid the despair of “OMG, what if this was a bad idea?”

The Dividend-Grower Solution

A great solution to this psychological challenge is also a great way to get reliable perennial investment income. This solution is to buy dividend stocks — those that not only pay dividends but do so increasingly and reliably over time.

Dividends are regular, small cash payments (usually monthly or quarterly) of a set amount per share; they are what companies pay investors to hold their stocks.

At their best, dividend stocks are companies that have gradually raised their dividends for decades because, as mature, profitable companies, they have the financial stability to do so. Most corporate boards review dividend amounts regularly, but most don’t increase them often, much less annually. Those that do are known as dividend growers.

Financial characteristics such as reliable revenues and profits, which enable corporate boards to justify dividend increases, make most dividend stocks pretty good investments irrespective of these cash payments. And many companies’ dividends are qualified, meaning a lower tax rate than ordinary income or interest, especially for those investors in high tax brackets.

For many individuals, holding a portfolio of dividend-grower stocks can be an effective investing strategy in just about any market. This can serve as an alternative to owning bonds, which, though their yield rose substantially in 2022, may still end up paying less net income than inflation during 2023.

Reliable Income and Potential Gains

And even in the best of circumstances, bonds held to maturity will never pay more than their annual yield; you’ll never get a raise. With dividend-grower stocks, you will probably get not only raises in income, but may also get gains from share price appreciation.

Dividend growers’ reliable dividend income, market stability and potential for gains (when sold at the right time) make them excellent candidates for the portfolios of physicians who are nearing retirement and seeking retirement income.

Of course, it’s best to diversify such holdings as to sector and industry to reduce risk. To achieve greater diversification, investors can buy funds instead of individual stocks. Two exchange-traded funds worth considering now are: Invesco Dividend Achievers (PFM), whose holdings have all increased dividends for more than 10 years, with a dividend yield in late December of 1.8% annually; and ProShares Dividend Aristocrats (NOBL), whose holdings have more than 25 years of consistent dividend increases, also with a dividend yield of 1.8%.

In return for the convenience and diversification that such funds confer, investors pay fees that naturally reduce net dividend income. Investors with the resources to buy share blocks of dozens of stocks, such as physicians, can better achieve diversification and position for more income by buying shares directly. (They may get ideas about which stocks to buy directly by looking up the holdings of these two ETFs, using the research tools offered by their investment accounts online.)

Four Stocks to Consider

Investors sizing up dividend-grower stocks individually may want to consider four companies likely to grow over the next two or three years:

• Genuine Parts (GPC) – Dividend yield as of late December, 2%. A wholesale distributor of automotive replacement parts, GPC is the parent company of well-known NAPA Auto Parts. Long-term prospects for this business are enhanced by the increasing average age of vehicles in the U.S., which rose to a record high of 12.2 years in 2022, according to information services firm IHS Markit. EVs may eventually be a headwind for this company but won’t be a significant factor until EV adoption becomes far more prevalent, perhaps 10 or more years down the road. In the meantime, American gasoline-powered cars will age and need more parts. Genuine Parts has raised its dividend for 66 consecutive years, making it an S&P 500 Dividend Aristocrat and the only company in the U.S. auto industry to hold that distinction.

• Fastenal (FAST) – Dividend yield, 2.6%. Fastenal distributes fasteners and other industrial and construction supplies through more than 1,700 stores throughout the U.S. and in a few foreign countries. Growth in infrastructure construction, which will be aided by stimulus from the Infrastructure Act of 2022, could accelerate sales over the next few years. Even if construction levels off, revenues and earnings could still surprise the market on the upside, if existing momentum is any indication. In the five years through 2021, sales of Fastenal grew at a compounded annual rate of 9% and earnings, 13% — both enviable numbers. As of late December, the share price was down more than 25% from its 52-week high.

• Broadcom (AVGO) – Dividend yield, 3.3%. Broadcom is an example of a mature tech stock and what I call TARP: tech at a reasonable price. (Younger, less profitable and often profitless tech companies typically don’t pay dividends because they need every dime for R&D.) Broadcom is a leading designer, developer and global supplier of a broad range of analog semiconductor devices. Broadcom has a high degree of recurring revenue from multiyear contracts, both in semiconductors and infrastructure software. Data center buildouts and infrastructure upgrades are driving greater adoption of Broadcom’s switching platforms for networking, along with growing sales driven by server storage demand. In late December, the company’s stock price was down more than 18% from its 52-week high. The company’s purchase of VMware is expected to grow earnings, as this will be a source of recurring revenue.

• Cisco Systems (CSCO) – Dividend yield, 3.15%. Another mature TARP company, Cisco sells a broad range of technology products for networking, security and collaboration applications, and for the cloud. The company’s transition toward software is progressing well. About 53% of the company’s revenue came from software and services in 2021, and 85% of its software revenue is now from subscriptions in the software-as-a-service (SAS) model. In late December, the stock price was down about25% from its 52-week high.

By buying dividend growers while their prices are still depressed, investors can position for eventual gains and start collecting dividend income immediately. These long-term holds can help anxious investors sleep without nightmares over what the market might do in the short run.

Dave Sheaff Gilreath, CFP®, is a 40-year veteran of the financial services industry. He is a partner and chief investment officer of Sheaff Brock Investment Advisors, LLC, a portfolio management firm for individual investors, and Innovative Portfolios, LLC, an institutional money management firm. Based in Indianapolis, the firms manage about $1.3 billion in assets nationwide.