Passive-income stocks are a proven way to cushion your portfolio against market volatility. What's more, top shelf dividend plays also tend to outperform other asset classes in bull markets.
Not all dividend stocks are cut from the same cloth, however. The best passive-income plays -- defined as stocks capable of delivering both downside protection in bear markets and capital appreciation in bull markets -- are intrinsically linked to companies with rock-solid free cash flows.
With this backdrop in mind, here are two top-notch passive-income stocks that investors won't regret buying in 2023.
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1. AbbVie
AbbVie (ABBV 0.98%) is a large-cap pharmaceutical company with a well-earned reputation as a top dividend growth stock. Since its inception in 2013, the drugmaker has raised its dividend by approximately 30% per year on average. And thanks to its diverse portfolio of aesthetics, cancer, eye care, immunology, and neuroscience products, AbbVie has been generating $16.7 billion in average net free cash flows over the past four straight years.
Nonetheless, AbbVie's stock has slumped during the first three weeks of 2023, down 7.4% at the time of this writing. Concerns about the drugmaker's ability to overcome upcoming biosimilar launches in the U.S. for its flagship immunology medication, Humira, have caused some investors to move to the sidelines this year. These concerns aren't entirely without merit. The drugmaker's top line is forecast to dip by 6.8% this year relative to 2022.
There are two clear reasons income investors ought to pounce on this pullback, however. First, AbbVie has a solid plan in place to move past Humira as its lead revenue generator. This plan centers on leaning into newer immunology medications, like Skyrizi and Rinvoq, leveraging its aesthetics portfolio from the 2020 acquisition of Allergan, and fortifying its already top-shelf hematology franchise. AbbVie, per its internal forecast, expects this strategy to return the company to high levels of top-line growth as soon as 2025.
Second, AbbVie's management has unequivocally proved its dedication to paying out one of the industry's most generous dividends. Speaking to this point, the drugmaker's annualized yield is currently bumping up against the 4% mark, which is among the highest within the large-cap biopharma space. There simply aren't many top-notch dividend stocks that offer that kind of elevated yield and built-in level of safety.
AbbVie, in short, will eventually rebound from this weakness. And, longer term, this dividend stock ought to return to form as a market-beating vehicle for patient investors.
2. Amgen
Amgen is another large-cap biopharma stock that ought to appeal to the passive income crowd. The biotech pioneer sports a highly diverse product portfolio consisting of cancer, immunology, general medicine, and biosimilar medications.
Over the first nine months of 2022, Amgen boosted its dividend yield by 10%, repurchased $6 billion of its own shares, and executed two key acquisitions with ChemoCentryx and Horizon Therapeutics. Amgen has averaged net free cash flows of approximately $10 billion annually over the prior four years.
What's the risk? Amgen has two knocks against it. First, the company doesn't have a bona fide flagship medication. Instead, Amgen relies on a strength-in-numbers approach to deliver modest levels of top-line growth. This strategy has the upside of avoiding major declines in revenue as star drugs lose exclusivity, but it also tends to come with lower levels of annual revenue growth.
Second, Amgen is going through a hefty product turnover at the moment. To counter the impact of copycat medications for key revenue generators, the biotech spent nearly $28 billion on Horizon Therapeutics last year, a move that ought to bolster its inflammation and nephrology franchises.
What's the bottom line? Amgen has steadied the ship with the Horizon acquisition, and its pipeline could deliver multiple new growth products in the coming years. In turn, income investors shouldn't shy away from capitalizing on the company's above-average annualized yield, which currently stands at 3.24%.
