3 Must-Have Dividend Stocks For 2023

Summary

• Dividend growth investing keeps the eye on growth, but makes sure there's some immediate return. These 3 stocks are must-haves for DGI enthusiasts.
• I look at the companies' story, dividends, growth, and current valuation compared to their history.
• These stocks are potential outperformers with steady shareholder returns.
• The short-term fluctuations of the market often provide opportunities to buy long-term winners.

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Dividend growth investing is an attractive way to get some immediate cash return on stocks while keeping a large upside potential. I look at three dividend stocks with expected solid dividend growth undervalued by the market.

These stocks don't pay high yields (yet). Their yields are often between 1% to 2%. The growth expectation changes its yield over time. The stock price often moves in line with the dividend.

Dividend Growth Outperforms High Dividend Yield

Data by YCharts

Historically, it's been better to invest in dividend-growth stocks. ETFs focused on dividend growth offer better returns in the long run and often have better performance during bear markets too.

I Avoid High Yield Dividend Stocks

The cost of high yield is often slow growth. Immediate satisfaction in terms of high cash dividends isn't worth it. Very high dividend yields (6%+) often come with the risk of a dividend cut sooner or later.

I understand why some people like high yields to live off dividends. The big question is if they're really worth it. Investing is mostly done with capital that isn't needed in the next five to ten years. In such a time period, it's also possible to get capital gains and sell some off as Buffet often advises.

My Selection Method

I use a straightforward stock selection method to find undervalued growth stocks. It's a strategy to find long-term winners with substantial upside potential.

Being undervalued doesn't mean they trade at really low PE or EV/FCF ratios. The ratio in comparison to past growth and potential future growth is important.

• Substantial revenue per share growth.
• A sturdy balance sheet with low leverage.
• Reasonable valuation based on FCF and PE ratios relative to their growth.
• Stocks that return cash to shareholders with buybacks and/or dividends are often run by shareholder-friendly management. For this selection, I specifically look at stocks with dividends obviously.

I used the selection method before in several articles in the past months:

• 4 Growth Stocks To Buy As Inflation Cools
• 4 Stocks To Buy And Hold During The Selloff

Abbott Laboratories (ABT)

Abbott is an innovator with an outstanding track record. The company aims to be a market leader in its products and often succeeds. Its medical devices for vascular care and medical care are prime examples.

Data by YCharts

Abbott grew its revenue per share by 8% CAGR over the past decade. Its EPS even increased at 22.1% CAGR. Such growth gets rewarded handsomely by an increasing share price.

The company gained further during the covid crisis due to its COVID test kids. These test kids provided positive earnings surprises throughout 2022. The fourth quarter surprised wall street positively again. The company's non-COVID revenue also increased by 5.2% annually despite the COVID distraction.

Abbott just released its fourth-quarter results as I write this. It beat analyst expectations. Its outlook isn't inspiring as it expects an 18% drop in adjusted EPS. This isn't as surprising as COVID-19 testing sales were $8B in 2022 and it expects only $2B in 2023. Beyond 2023, I expect strong growth again from Abbott.

Dividend Growth

Data by YCharts

A 13.8% dividend growth rate over the past 10 years shows Abbott's dedication to shareholder value creation and returns. The growth wasn't consistently year-on-year but steady enough. Abbott's payout ratio of 39% leaves plenty of room for growth investments and stock repurchases.

ABT Valuation

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Abbott's valuation looks good. Its PS ratio became more expensive due to increasing margins. The PE ratio and EV to FCF are at the low end of their recent history and leave more near-term upside. Long term, its growth profile supports the current valuation.

Read my recent piece about Abbott for more details.

UnitedHealth Group (UNH)

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UnitedHealth is one of the largest healthcare insurance companies globally with major operations in the United States. It provides health insurance to individuals and businesses through several subsidiaries such as Optum and UnitedHealthcare.

Its vast scale offers benefits in terms of low churn and easily increased prices in line with its cost inflation. The company targets a long-term increase of EPS of 13%-16%.

Dividend Growth

Data by YCharts

UnitedHealth's dividend growth of 19.4% CAGR over the past decade is impressive. It slowed slightly over the past few years and raised the dividend by 14.3% in 2022. The 30% payout ratio leaves enough cash for more growth, acquisitions, and steady buybacks.

UNH Valuation

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UnitedHealth became more expensively valued over the past decade. Investors appreciate the steady revenue growth and subsequent dividend growth. Its outlook remains positive as higher interest rates are attractive for insurance companies. The recent fallback makes its valuation reasonable.

Stifel Financial (SF)

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Stifel is a global wealth manager and financial advisor. The company grew its steady asset management business as the most important section of the company. Even in 2022, it manages to increase its net revenue from Global Wealth management despite a tough market environment. Its institutional advisory revenue lowered due to a slow M&A market.

Stifel just released its Q4 earnings. It missed slightly on EPS due to the slump in investment banking.

Stifel FY 2023 Outlook (Seeking Alpha)

The outlook of Stifel is very positive with 10% top-line growth and 24% EPS growth. It supports the case for further growth and dividend increases.

Dividend Growth

Data by YCharts

Stifel just increased its dividend by 20% to $0.36 quarterly. It introduced a $0.10 quarterly dividend in 2017 and raised it by 23.8% annually since. The management also commented that it expected to use more free cash flow for shareholder returns and less for acquired growth. The recent 20% dividend is a clear signal of its commitment to shareholder returns.

SF Valuation

Data by YCharts

Stifel is cheaply valued. It increased its margins with organic and inorganic growth. The PE ratio hovers around its lowest level in 10 years. Free cash flow is rather bumpy but looks cheap as well. A drastic change in the environment incites such undervaluation and it's impossible to predict when the M&A market picks up again. It will happen though and Stifel will shine once again.

I went deeper into Stifel Financial's growth before.

Conclusion

I personally don't look exclusively at dividend stocks. I'm also happy with buybacks. Some form of cash returns to shareholders is often a sign of shareholder-friendly management. I've noticed that most of the stocks I select do pay dividends.

This is a good starting point to build a dividend growth portfolio. I'm always glad to hear others' thoughts and look forward to reading them in the comments below.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Disclosure: I/we have a beneficial long position in the shares of ABT, SF, UNH 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.