When novice investors are looking for ways to build wealth through the stock market, they can often overlook one of the most reliable methods: Buying shares of long-established quality companies that pay dividends, and reinvesting those payouts in more shares.
It may not be as exciting as the hunt for the next big thing, but it works. To illustrate how well, consider this: Between 1960 and 2021, a portfolio built to match the S&P 500 index would have grown by almost 500 times in value -- and the reinvested dividends would have contributed 84% of that total return.
Companies that have histories of paying regular dividends are usually on solid footing financially and consistently generate profits -- qualities that allow those businesses to keep chugging along even during the occasional inevitable hiccups in the economy.
We asked three Motley Fool contributors to pick their favorite dividend stocks to buy right now. Here's why they think that Coca-Cola (KO +0.96%), Camping World (CWH +6.91%), and McDonald's (MCD 0.38%) are smart, safe bets heading into 2023.
NYSE: KO
Key Data Points
This dividend superstar is beating the market
Jennifer Saibil (Coca-Cola): Coca-Cola is having a banner year. After rebounding from early pandemic declines, it's now progressing to healthy growth -- fueled in part by a corporate restructuring.
There are many features that stand out about Coca-Cola and make it an excellent company, but recently it has been demonstrating a degree of agility that's typically challenging for huge companies. When its away-from-home segment's sales plunged during the pandemic's lockdown phase, it moved to expand options for supermarket shoppers. Now, with inflation making everything more expensive, it has started selling its products in smaller containers and volumes so that customers can still get their favorite beverages without paying more.
Coca-Cola's net revenue increased 10% year over year in the third quarter, and the company even posted increases in operating income and earnings per share, although its operating margin was slightly lower year over year. Management said that it gained market share in its core category of non-alcoholic ready-to-drink beverages.
Although it trimmed the number of beverage brands in its portfolio by half when it was restructuring to focus on its best-performing brands, it is also developing new brands, especially in the ready-to-drink alcoholic category. Management sees plenty of opportunity to expand in that segment, and it also believes it has a long runway to capture greater market share in its core business.
What many investors particularly love about Coca-Cola is its dividend. Coca-Cola is a Dividend King and has raised its payouts for 60 years consecutively. Not only has it been super-reliable, even raising its payouts during the period of severe sales declines at the beginning of the pandemic, but it offers a relatively high yield -- 2.75% at the current share price. It's usually around 3%, but yields move inversely with stock prices, and Coca-Cola's stock price is up 9% year to date, far outperforming the down market.
Coca-Cola is a top dividend stock that can protect your portfolio now and provide many years of wealth-building power in the future.
NYSE: CWH
Key Data Points
A monster yield from a niche leader
Jeremy Bowman (Camping World): If you're looking for a high-yield consumer-facing dividend stock, it's hard to find a better one than Camping World Holdings.
Camping World is the leading retailer of recreational vehicles (RVs) in the U.S., operating nearly 200 locations in 42 states. It has expanded through a roll-up strategy, acquiring independents and small dealerships to consolidate its position in the RV niche.
At its current share price, Camping World's dividend yield is 10.3%, and the stock trades at a price-to-earnings ratio of just 4.6.
The RV industry is highly cyclical as they are expensive purchases, and the travel industry is cyclical to begin with. Savvy investors may know that a high yield and a low P/E ratio can signal a value trap, or a company on the decline that won't be able to sustain its dividend payouts at their current levels. However, there are reasons to believe Camping World can overcome the current economic headwinds, even though its revenue declined slightly in its most recently reported quarter and its earnings fell as it lapped the sales boom it experienced earlier in the pandemic.
Management is seeing strength in the used car market, which grew slightly in the third quarter, and the company believes it can grow annual used car sales to $3 billion, up from a run rate of just over $2 billion today. CEO Marcus Lemonis said on the third-quarter earnings call that he expects the company's strength in used vehicles and its Good Sam membership program to help it outperform the industry over the next 12 to 24 months.
The company is committed to funding the dividend, and its payout ratio is less than 50% on a trailing basis and just 68% based on analyst estimates for 2023.
While Camping World is riskier than some other dividend stocks, its high yield and low valuation make it worth the risk. If next year's expected recession is milder than feared, investors may not only benefit from a double-digit yield, but also from a soaring stock price on the other side of the economic recovery.
NYSE: MCD
Key Data Points
The golden arches are shining brighter than ever
John Ballard (McDonald's): McDonald's has paid dividends since 1976, and management just raised the payout by 10% for the company's 46th consecutive annual increase. Its consistent operating performance and dividend hikes have supported solid returns for investors even during periods of market volatility.
Over the last three years, the stock has outperformed the S&P 500 index by a fairly wide margin -- it's up 40% compared to the index's gains of 27%. And on a total return basis, factoring in the dividends, McDonald's outperformance was even wider -- 49% to the S&P's 32%.
McDonald's pays out most of its annual profits in dividends, and currently offers a quarterly payment of $1.38 per share. At recent share prices, that gives it a yield of 2.05%. The company has increased the dividend by 36% over the last five years, but investors should expect McDonald's to continue growing for many years.
The company's latest sales update shows it is successfully adapting to appeal to a new generation of customers, in addition to catering to cash-strapped consumers in a high-inflation environment. McDonald's delivered solid comp-store sales growth of 9.5% in the most recent quarter. Management attributed that gain to investments in digital ordering, new menu items, and the chain's new loyalty program.
McDonald's is an iconic brand that has successfully shifted its strategy to stay relevant -- and that's a sign of a business built to last. Trading at a price-to-earnings ratio of 34, the stock isn't going to score points for value. But with operations in more than 100 countries generating over $23 billion in annual revenue, McDonald's has the scale and financial strength to weather a slow economy and keep going, as it is doing right now.
