The beauty of investing for dividend income is that when it's done right, the strategy can provide investors with streams of inflation-topping growth in passive income. With the Consumer Price Index rising 7.1% year over year in November, besting inflation has been difficult as of late.
But there are still dividend growth stocks out there that have recently declared strong dividend hikes and could continue to do so. Here are two that are worth buying in 2023 and holding on to over the long run.
Image source: Getty Images.
1. Amgen: A cutting-edge biotech company
Amgen's (AMGN -1.65%) medicines reach millions of patients throughout the world each year, which positions it as one of the largest pharmaceutical companies on the planet. As you would expect from a big pharma company, its portfolio offering is diversified across a number of therapeutic areas, such as oncology, bone health, and inflammation, to name just a few.
Amgen boasts a product portfolio consisting of dozens of therapies. The immunology medicines known as Enbrel and Otezla and the bone health drug called Prolia are just three of nine drugs in the company's lineup that are on pace to be blockbusters in 2022. For reference, a blockbuster is a product that generates at least $1 billion in annual revenue.
And aside from just these products, Amgen has 38 compounds currently in different stages of clinical development in its drug pipeline. These include biosimilar candidates for megablockbuster drugs (i.e., $5 billion-plus in annual sales) like Johnson & Johnson's immunology star dubbed Stelara and Regeneron's smash-hit eye injection therapy labeled Eylea. That explains why analysts are anticipating 7% annual earnings growth over the next five years from Amgen. For context, this slightly beats out the drug manufacturer industry average growth outlook of 6.9%.
Amgen's 3.2% dividend yield is almost twice the S&P 500 index's 1.7% payout. And if that weren't enough, the dividend payout ratio should only come in at approximately 44% in 2022. This gives the company the flexibility to announce many more dividend raises going forward, like the most recent of 9.8%.
The cherry on top is that Amgen's forward price-to-earnings ratio of 15 represents a modest discount to the S&P 500 pharmaceutical industry average forward P/E ratio of 15.2. This makes the stock a convincing buy for dividend growth investors heading into 2023.
2. CVS Health: A diversified titan of the healthcare sector
Whether you need health insurance, a prescription filled, or over-the-counter health products, CVS Health (CVS -1.14%) has you covered. The company's retail pharmacies are within a five-mile radius of 85% of Americans. And the health insurance subsidiary known as Aetna insured 24.3 million members as of Sept. 30. This makes CVS Health one of the biggest all-around publicly traded healthcare companies.
But that doesn't mean that the company is resting on its laurels. CVS Health is diversifying its portfolio with new health services like the rollout of its MinuteClinic at more locations. MinuteClinics provide patients with in-person and virtual care seven days a week at a 40% savings compared with urgent care clinics. Due to the increased interactions with customers from these clinics and favorable demographics, analysts are projecting 5.5% annual earnings growth through the next five years.
Given that CVS Health's dividend payout ratio will come in at roughly 25% in 2022, its 2.6% dividend yield also looks to be well covered. This explains why the company was optimistic enough to reward shareholders with a 10% dividend hike recently.
And at a forward P/E ratio of 10.6, CVS Health is cheap compared with the healthcare plan industry's average of 16.7. That's what makes the stock a compelling long-term buy for dividend growth investors ahead of 2023.
