Following what must have seemed like a dream year for investors -- 2021 featured a peak correction in the benchmark S&P 500 (^GSPC 0.61%) of just 5% -- 2022 has been a nightmare. All three major U.S. stock indexes have plummeted into a bear market, with the S&P 500 producing its worst first-half return in more than 50 years.
Worse yet, the new year might give way to a recession. While no indicator is foolproof, the interest rate yield curve is exhibiting its biggest inversion in four decades (i.e., short-term-maturing Treasury bond yields are considerably higher than long-term-maturing bonds). Historically, this has been a telltale warning that a recession is in the offing.
Image source: Getty Images.
However, economic headwinds are no reason for investors to head for the sidelines. In fact, they're the perfect excuse to buy dividend stocks. Companies that pay a dividend are almost always profitable on a recurring basis, and they usually have transparent long-term growth outlooks. In other words, they're just the time-tested businesses you'd want to own during periods of heightened uncertainty.
One of the best places to look for rock-solid income stocks is the broad-based S&P 500. The index, which is home to nearly 400 dividend-paying companies, has three high-yield dividend stocks that are begging to be bought for 2023.
AT&T: 5.81% yield
Telecom stocks have been anything but exciting since the end of the Great Recession. Historically low interest rates helped growth stocks shine, while stalwarts like AT&T (T +1.26%) were mostly forgotten by Wall Street and everyday investors. However, with a key catalyst on its plate and an important transformation now complete, AT&T has the look of a winner in 2023, if not well beyond.
NYSE: T
Key Data Points
The most-important growth driver for AT&T in over a decade is the 5G wireless shift. Although the company is spending billions of dollars to upgrade its wireless infrastructure in order to improve download speeds, the move has proved to be well worth it.
Wireless service revenue jumped 5.6% during the September-ended quarter. That might not sound like much, but it was the fastest growth rate for AT&T's wireless segment in over 10 years. Consumers and businesses are excited about the prospect of faster downloads and are liable to purchase 5G-capable devices for years to come. The end result is increased data consumption, which is where AT&T generates its best margins.
To build on this point, AT&T is also enjoying substantial growth from its broadband operations. Sales from the company's AT&T Fiber segment jumped more than 30% in the latest quarter, with the company registering its 11th consecutive quarter with at least 200,000 net AT&T Fiber customer adds. Broadband may not be the growth story it was in the early 2000s, but for AT&T it represents a no-brainer way to bolster its margins via bundling and improve its operating cash flow.
In terms of the aforementioned transformation, AT&T spun off content arm WarnerMedia in April, which subsequently merged with Discovery to create Warner Bros. Discovery. When this merger closed, Warner Bros. Discovery assumed some of AT&T's debt tied to WarnerMedia, as well as paid the company cash. The aggregate value of this debt assumption and cash totaled $40.4 billion. The important takeaway here is that AT&T's balance sheet gained some much-needed breathing room.
Though AT&T isn't going to knock your socks off with its growth rate, the company's 5.8% yield is rock solid, and its forward-year price-to-earnings ratio of less than 8 puts a relatively safe floor beneath its share price.
NASDAQ: INTC
Key Data Points
Intel: 5.17% yield
A second high-yield S&P 500 dividend stock that's begging to be bought by opportunistic investors in the new year is semiconductor specialist Intel (INTC +1.14%).
To be up front, Intel is a cyclical business that isn't going to turn on a dime. This is to say that economic weakness could very well adversely impact its backlog and order demand in the near term. Also, Intel has also been contending with tough competition from chief rival Advanced Micro Devices, which has been pilfering some of its central processing unit (CPU) share in personal computers, mobile, and data center servers.
But what investors are getting with Intel is a semiconductor leader that simply hasn't been this cheap on the basis of book value in its entire history as a publicly traded company, dating back to the 1980s. Additionally, its yield of 5.2% has never been this high.
Although investors are clearly concerned with AMD clawing its way to market share gains, Intel still accounts for the lion's share of CPUs in data center servers, personal computers, and mobile devices. As long as Intel can maintain market share of 80% or higher in these segments, it can generate mountains of operating cash flow that can be diverted to research, innovation, and high-growth initiatives.
One of the more interesting ways Intel is looking to the future is with its Foundry operating segment. In September, the company broke ground in Ohio on two chip-manufacturing facilities set to open in 2024. This $20 billion investment comes on the heels of President Joe Biden signing the CHIPS and Science Act into law in August. The CHIPS Act will provide up to $52.7 billion in subsidies to chipmakers for design grants and domestic manufacturing facilities.
Also, as I pointed out earlier this week, Intel should continue to benefit from its majority investment in autonomous vehicle company Mobileye Global, which went public less than two months ago. Mobileye was Intel's fastest-growing operating segment during the third quarter, with sales growth of 38% and an annual sales run-rate of $1.8 billion.
For patient investors, the ability to snag shares of Intel this close to its book value is a gift.
Image source: Getty Images.
Walgreens Boots Alliance: 4.75% yield
The third S&P 500 dividend stock that's ripe for the picking in 2023 is pharmacy chain Walgreens Boots Alliance (WBA +0.00%). Walgreens may have the "lowest" yield on this list at 4.8%, but the company is working on a 47-year streak of increasing its base annual payout.
Normally, the best thing about healthcare stocks is that (bad pun alert!) they're immune from recessions. People don't stop getting sick just because the U.S. economy or stock market hit a rough patch.
But during the COVID-19 pandemic, Walgreens found a loophole to this generally defensive "rule." Since most of its revenue derives from brick-and-mortar stores, Walgreens was clobbered by lockdowns during the initial waves of infection. However, with COVID-19 slowly moving into the rearview mirror, investors have an opportunity to scoop up shares at an incredible valuation.
NASDAQ: WBA
Key Data Points
For years, Walgreens has been focused on a multipoint turnaround strategy, primarily geared at improving customer loyalty and increasing its organic growth rate. The company's quarterly operating results suggest it's making excellent headway on all fronts.
As a Walgreens Boots Alliance shareholder, the most exciting development is its partnership with, and majority investment in, VillageMD. Walgreens and VillageMD plan to open as many as 1,000 colocated, full-service healthcare clinics in over 30 U.S. markets. Whereas most of these neighborhood-styled clinics can handle vaccinations or a sniffle, the clinics operated by Walgreens/VillageMD will be staffed by physicians and more conducive to a broad range of repeat visits. As of Aug. 31 (the end of Walgreens' fiscal year), 152 of these clinics were open in the U.S.
In addition to full-service health clinics, Walgreens has willingly spent on direct-to-consumer initiatives. Even though it remains a brick-and-mortar-driven business, the pandemic has taught management the importance of giving shoppers access to online sales and expanded drive-thru pickup. Digital sales can sustain a double-digit growth rate for the company in 2023.
The company has also tidied up its balance sheet. Walgreens sold off its wholesale drug business last year to reduce its outstanding debt, and it's shaved more than $2 billion off of its annual operating expenses.
Walgreens Boots Alliance remains inexpensive, at roughly 8 times Wall Street's forecast earnings for the company in fiscal 2024.
