As we look forward to 2023 — after a year of steep losses in many stocks in 2022 — we believe that there is significant opportunity in many dividend stocks. Shares of companies that have been beaten down in 2022, but now show good potential for higher valuations, maintained or raised dividend payments, and earnings upside are on the menu for the new year.
Let’s take a look at three companies we like that have high dividends, as well as high expected total returns looking forward.
‘Big’ Yield and Upside Potential
Our first stock is Big Lots (BIG) , a home discount retailer in the U.S. The company sells general merchandise in various categories, including furniture, seasonal, soft home goods, hard home goods, decorations, beverage and grocery, pet food and accessories, jewelry, apparel, and more. The company operates more than 1,400 stores in the U.S. in nearly every state, and was founded in 1967. Big Lots trades with a market cap of $400 million, and produces about $5.5 billion in yearly revenue.
Big Lots shares have performed quite poorly in 2022, falling 71% excluding dividends so far this year.
The company started paying dividends to shareholders in 2014, and raised the payout a total of five times to the current run rate of $1.20 annually per share. That rate has been in place since 2018, so Big Lots does not have a dividend increase streak to speak of. However, it has proven the willingness and ability to maintain its current dividend, and we believe it will do so indefinitely.
That’s important because the current yield is nearly 9%, and is therefore a big draw for the stock. Very few stocks have yields anywhere near that level, and it’s almost unheard of for a retailer. Big Lots stands apart from its competitors on this measure, provided it maintains its current dividend.
The current payout ratio is just 24%, so that would suggest the company’s dividend is quite safe, even if a recession strikes and materially harms earnings.
We are forecasting no growth for the foreseeable future, as Big Lots grapples with flat sales and a tough environment for costs and inventory levels.
However, given the stock trades for just 2.7 times this year’s adjusted earnings, we see massive upside from the valuation.
With this in mind, we see total annual returns for Big Lots of more than 30%, which would stem from the big dividend yield and valuation reflation.
This Dividend Stock Has the Right Mix
Our next stock is LyondellBasell Industries (LYB) , a chemicals manufacturer that operates globally. The company has six operating segments: Olefins and Polyolefins-Americas; Olefins and Polyolefins-Europe, Asia, International; Intermediates and Derivatives; Advanced Polymer Solutions; Refining; and Technology. Through these segments, the company produces a variety of a long list of chemicals and derivatives, as well as refining crude oil and other crude materials into various types of gasoline and distillates.
Lyondell was formed in 2009, produces about $51 billion in annual revenue, and trades with a market cap of $27 billion.
The shares of the stock have performed quite well considering what has transpired in 2022, losing just over 7% of their value excluding dividends.
The company’s dividend increase streak stands at 12 years, and the payout ratio on this year’s earnings is just 33%. That implies the dividend should be quite safe, even in the event of a recession, which is likely to harm earnings for chemical manufacturers.
The stock’s current yield is 5.8%, putting it at nearly four times that of the S&P 500, and quite elevated by Lyondell’s own historical standards. On a relative basis, the stock looks enticing based upon the yield in multiple ways.
We estimate the company saw a long-term top in earnings in 2021, and even with a lower base for 2022, growth is expected to be -5%. Lyondell’s earnings have always been quite volatile, and that is no different today.
The stock trades at 5.6 times this year’s earnings, which compares very favorably to our estimate of fair value at 8 times earnings. That could open the door for a tailwind of more than 7% annually in the coming years as the stock’s valuation moves back to historical norms. This could more than offset the decline in earnings we expect.
That leaves total annual returns of nearly 8% for LyondellBasell going forward as growth and the valuation nearly offset each other, and the sizable yield powers returns.
A High-Yield Tech Stock?
Intel Corp. (INTC) designs, manufactures, and sells computer products and services globally. The company operates through several different segments, including Mobileye (which is now a publicly-traded subsidiary with ticker (MBLY) ), as well as segments that make computer hardware, chipsets, memory and storage products, and more.
Intel was founded in 1968, generates about $63 billion in annual revenue, and has a current market cap of $111 billion.
Like many technology stocks, Intel’s share price has declined 50% in 2022, excluding dividends.
Intel’s dividend increase streak stands at eight years, which is reasonably favorable for the technology space, where dividends tend not to be particularly popular among management teams. Intel’s payout ratio is 75% for this year, so we see limited upside in the dividend apart from the company’s earnings growth rate.
The yield is excellent, however, at 5.4%, making Intel a high-yield stock, but also extremely high-yielding among its technology competitors. It is a rare income stock in a sea of stocks focused mostly on growth.
Speaking of growth, we believe Intel can produce 5% earnings-per-share growth in the years to come, which will also help the company maintain its dividend increase streak in the years to come. Should earnings grow, the capital available to return to shareholders will increase as well.
Intel actually trades ahead of our estimate of fair value at 12 times earnings, coming in today at just under 14 times earnings. That implies a ~3% headwind to total returns from the valuation, partially offsetting the ample dividend yield.
But when growth is added in, we see 7%+ total annual returns for buyers of Intel today.
While periods of market turmoil are difficult to endure, they can also create buying opportunities in good stocks. We see Big Lots, LyondellBasell, and Intel as three stocks with high dividends and high total return potential for 2023. Each offers a yield of at least 5%, making them all solid dividend stock choices heading into the new year.
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