While the S&P 500 and the Nasdaq Composite are both in bear market territory (down over 20% from their all-time highs), it may surprise investors that many energy and industrial stocks are actually up on the year.

The energy sector has been the standout -- up 59% year to date (YTD), while the industrial sector -- despite its cyclical nature -- is only down 7%.

Defense giant Raytheon Technologies (RTX 0.30%) and earth-moving equipment and industrial machinery manufacturer Caterpillar (CAT 0.73%) are both up over 15% YTD, while multi-faceted energy dynamo Phillips 66 (PSX -0.78%) is up over 44%.

Despite the relative outperformance, all three dividend stocks still have more room to run in 2023. Here's why.

A rocket bursts through the clouds into space.

Image source: Getty Images.

Raytheon Technologies has growth prospects in both end markets

Lee Samaha (Raytheon Technologies): Unlike many of its industrial peers, the commercial aerospace and defense company is likely to have a strong year, and that could be the case even if the economy weakens. 

The case for the stock in 2023 is based on three arguments. First, commercial aerospace flight departures are still significantly behind 2019 levels, and the industry will continue to recover as consumers prioritize catching up on lost travel plans – great news for aerospace aftermarket suppliers like Raytheon. Moreover, both Boeing and Airbus are aggressively ramping up aircraft production, so Raytheon's original equipment manufacturer businesses have strong growth prospects too. 

Second, management sees its defense businesses growing revenue at a mid-to-high-single-digit rate through 2025, driven by the increased focus on defense spending in light of the conflict in Ukraine. Meanwhile, the need to replenish equipment supplied to Ukraine will boost demand for Raytheon's defense systems. 

Third, an economic slowdown could actually help Raytheon deal with its biggest problem running over from 2022: namely, finding a way to execute orders and backlog in the light of supply chain challenges, including labor shortages. In a nutshell, a slowdown could help alleviate skill shortages and make it easier for Raytheon to retain and hire the skilled employees it needs -- Boeing's CEO has also made this specific point this year. 

At the time of writing, Raytheon's stock is up more than 15% in 2022, and I think there's more to come in 2023.

Even at an all-time high, Caterpillar is a buy

Daniel Foelber (Caterpillar): If you were to tell investors that the S&P 500 would be in a 20% drawdown and Caterpillar stock would be at all-time highs, few would probably believe you. But that's exactly where we find ourselves at the end of 2022.

Caterpillar is just one of many industrial stocks (like Deere, Honeywell, and several defense contractors) that are crushing the market this year -- and for good reason. Many of the valuations of these companies still trade at a discount to the market. And as my colleague Lee pointed out, there are many reasons to be optimistic about even better numbers in 2023.

Just as Raytheon Technologies is poised for a great year in 2023, so too could Caterpillar follow up 2022 with another banner year. The company is currently in the heart of an expansion. Following a record 2021, Caterpillar's 2022 performance has been impeccable.

CAT Revenue (TTM) Chart

CAT Revenue (TTM) data by YCharts

Trailing-12-month (ttm) revenue is at a five-year high, while ttm net income is at an all-time high. Even more impressive is that Caterpillar's results come despite the fact that the company said customers have been disciplined with their spending. 

Although conservative spending likely kept a lid on Caterpillar's 2022 numbers, the trend bodes well for less cyclicity in Caterpillar's business going forward. At the end of the day, Caterpillar benefits if its customers are doing well. And if its customers are more capital disciplined, that could set up a prolonged growth cycle for Caterpillar.

That's great news for long-term Caterpillar investors who have endured a rather painful boom and bust in the company's performance for the last decade -- which has been riddled with short-duration periods of growth and slowdowns.

Topping it all off, Caterpillar has raised its dividend for 28 consecutive years and has a dividend yield of 2%. 

Looking for a post-holiday sale? Phillips 66 is waiting for you in the bargain bin

Scott Levine (Phillips 66): Soaring 44% since the start of the year, shares of Phillips 66 are well on track to deliver a strong performance in 2022 -- one that's even more noteworthy considering the S&P 500's 20% decline. Investors who have powered their portfolios with Phillips 66, a company that operates both midstream and downstream assets, since the beginning of the year -- or earlier -- clearly have a lot to celebrate, especially considering the stock's attractive 3.7% forward dividend yield.

Those on the sidelines may look at the stock's past performance and its juicy dividend and wonder if it's too late to energize their holdings with this familiar face in the oil patch. It's a valid consideration, but it seems that shares of Phillips 66 have room to bound higher. Shares are trading at about 6.2 times operating cash flow, representing a discount to their five-year average multiple of 9.2.

Prefer the forward earnings multiple? No problem. From this perspective, shares seem even more undervalued. Currently, Phillips 66's stock is priced at 7.4 times forward earnings, notably lower than its five-year average forward earnings multiple of 16.6.

What could fuel the bulls to buoy the stock higher in 2023? Simply put, the market rewards growth -- something that the company is intent on delivering. It recently announced its plan to allocate $1.1 billion for growth projects in 2023. The majority of the growth capital, about $729 million, will be dedicated to growing the company's refining business, such as the conversion of its San Francisco Refinery to what the company proclaims will be "one of the world's largest renewable fuels facilities."

While time will tell if Phillips 66 succeeds in soaring higher in 2023, investors can count on management's steadfast dedication to investors to help grease the wheels of their passive income. Since the company started issuing a dividend in Q3 2021 to its most recently declared dividend in Q2 2022, the distribution has increased at a compound annual growth rate of 18%. And with the company's plan to return $10 billion to $12 billion to shareholders by the end of 2024, it seems that further hikes to the dividend are likely.