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Rising inflation and interest rates are two major characteristics that narrate the tale of the U.S. stock markets throughout 2022. The past year has been nothing less than a roller coaster for the market, witnessing the wildest events, ranging from Russia’s invasion of Ukraine and a mounting inflation catastrophe to Federal Reserve’s aggressive interest rate hikes. To top it off, the looming threats of the economy going into recession in 2023 have been hurting investors’ sentiments.
In the latest update from the Federal Reserve’s last monetary policy meeting of 2022, the benchmark lending rate was increased by 50 bps to curb inflation. This took the interest rate to 4.25-4.5%, the highest since 2007. This marked the Fed’s seventh straight interest rate hike in 2022 and reflected a slowdown from the outsized hikes of 75 bps in the last four meetings.
Additionally, the Fed policymakers anticipate a three-quarter point increase in the interest rates for 2023 to 5-5.25%. The officials noted that inflation rates remain elevated and expect the ongoing hikes in interest to help improve demand and lower surging inflation. The Fed also lowered GDP projections for 2023 to 0.5% compared with 2.1% mentioned earlier. It anticipates inflation to continue to surge, with expectations revised to 5.6% for 2022 (from 5.4% stated earlier) and 3.1% for 2023 (versus 2.8%).
With the risks of elevated inflation and the resulting rise in interest rates, interest-sensitive sectors like housing look troubled. Additionally, the risks of geopolitical tensions are likely to continue in 2023, resulting in fears of a continued lackluster performance of the S&P 500 index. So, what should an investor do at this time?
At this time, building upon a portfolio of high-yield dividend stocks could be an excellent way to play in the stock market. The dividend-paying stocks not only offer a defensive play in a troubled market but also provide a steady income for investors amid recessions.
Why Dividend Investing?
Investing in dividend-paying stocks provides investors with a regular income stream and long-term growth potential. Investors, who do not require a regular stream of income, may choose to reinvest dividends for capital accumulation or increase wealth over the long term.
The dividend aristocrats, companies that have a history of increasing their dividends annually for the past 25 years, are the safe investment options. Sectors, including healthcare, consumer staples and utilities, are traditionally considered defensive plays and offer attractive returns to investors in the form of dividends.
However, one must be judicious in selecting stocks. The best way is to compare dividends in relation to the company’s net earnings. Companies with high dividend-yield, with a decent payout ratio and strong earnings prospects, can be rewarding investment choices for long-term returns.
These S&P 500 stocks have a dividend yield of more than or equal to 2%, as well as a five-year historical dividend growth rate of more than 5%. The stocks have payout ratios of less than 60, reflecting enough room for dividend increases.
The above-mentioned combination is compelling for investors interested in owning well-known companies with a steady and long-term income based on stability amid volatility.
Gilead Sciences (GILD - Free Report) : The Foster City, CA-based company is a pioneer in developing drugs for the treatment of human immunodeficiency virus (HIV), liver diseases, hematology/oncology diseases and inflammation/respiratory diseases. The company was the first to bring a single-tablet regimen to market for the treatment of HIV. GILD is poised to benefit from its efforts to transition the HIV portfolio to drugs with improved long-term safety profiles. It also expects to gain from the expansion beyond antivirals into the lucrative oncology space.
Gilead has an estimated long-term earnings growth rate of 15.7%. The company pays out a quarterly dividend of 73 cents ($2.92 annualized) per share, yielding 3.29% at the current stock price. GILD’s payout ratio is 46%, with a five-year dividend growth rate of 6.89%. The company has a Zacks Rank #2 at present. (Check GILD’s dividend history here)
Conagra Brands (CAG - Free Report) : The Chicago-based leading branded food company of North America has been gaining from its premium edible products, with a refined focus on innovation. Conagra has been strongly committed to innovation, which is the key to the company’s success. Prudent innovations have been helping the company to modernize its portfolio and meet consumers’ changing needs. Some of the company’s new products have been top-performing in several categories, such as toppings, plant-based protein and single-serve meals. CAG’s efficient pricing initiatives have been offering respite amid the cost headwinds.
Conagra has an estimated long-term earnings growth rate of 7%. The company pays out a quarterly dividend of 33 cents ($1.32 annualized) per share, with a 3.45% yield at the current stock price. CAG’s payout ratio is 54%, with a five-year dividend growth rate of 11.23%. The company currently has a Zacks Rank #2. (Check CAG’s dividend history here)
Caterpillar (CAT - Free Report) : The Deerfield, IL-based company is the largest global construction and mining equipment manufacturer. It is known for its iconic yellow machines. Caterpillar’s focus on innovation, investment in digital capabilities and demand stemming from infrastructure spending and energy-transition trends should help it maintain an upbeat performance. It continues to focus on customers and the future by investing in digital capabilities, connecting assets and job sites, and developing the next generation of more productive and efficient products. CAT is funding initiatives that drive long-term growth focused on areas of expanded offerings and services, and digital initiatives like e-commerce, sustainability and electrification.
Caterpillar has an estimated long-term earnings growth rate of 12%. The Zacks Rank #2 company pays out a quarterly dividend of $1.20 ($4.80 annualized) per share, with a 2.04% yield at the current stock price. CAT’s payout ratio is 38%, with a five-year dividend growth rate of 8.94%. (Check CAT’s dividend history here)
Citizens Financial Group (CFG - Free Report) : Headquartered in Providence, RI, Citizens Financial is one of the largest retail bank holding companies in the United States. The company benefits from growing loans and deposits. Its focus on revenue and efficiency initiatives is another tailwind. Efforts to enhance the deposit base and a strong loan pipeline indicate balance-sheet strength. Moreover, with its robust capital position, the Zacks Rank #2 company has expanded and diversified operations through various acquisitions.
Citizens Financial pays out a quarterly dividend of 42 cents ($1.68 annualized) per share, yielding 4.21% at the current stock price. CFG’s payout ratio is 35%, with a five-year dividend growth rate of 15.2%. (Check CFG’s dividend history here)
Citizens Financial Group, Inc. Dividend Yield (TTM)
NRG Energy (NRG - Free Report) : Founded in 1989, the company is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial and commercial consumers in major competitive power markets in the United States. It has financial and commercial headquarters in Princeton, NJ, and operational headquarters in Houston, TX. The company’s acquisitions, services to a wide variety of customers, focus on emission cuts and dividend policy will boost its long-term growth objectives.
NRG Energy has an estimated long-term earnings growth rate of 12.08%. The company pays out a quarterly dividend of 35 cents ($1.40 annualized) per share, with a 4.19% yield at the current stock price. NRG’s payout ratio is 23%, with a five-year dividend growth rate of 105.21%. The company currently has a Zacks Rank #2. (Check NRG’s dividend history here)
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Top 5 High-Yield S&P 500 Stocks to Buy for 2023
Rising inflation and interest rates are two major characteristics that narrate the tale of the U.S. stock markets throughout 2022. The past year has been nothing less than a roller coaster for the market, witnessing the wildest events, ranging from Russia’s invasion of Ukraine and a mounting inflation catastrophe to Federal Reserve’s aggressive interest rate hikes. To top it off, the looming threats of the economy going into recession in 2023 have been hurting investors’ sentiments.
In the latest update from the Federal Reserve’s last monetary policy meeting of 2022, the benchmark lending rate was increased by 50 bps to curb inflation. This took the interest rate to 4.25-4.5%, the highest since 2007. This marked the Fed’s seventh straight interest rate hike in 2022 and reflected a slowdown from the outsized hikes of 75 bps in the last four meetings.
Additionally, the Fed policymakers anticipate a three-quarter point increase in the interest rates for 2023 to 5-5.25%. The officials noted that inflation rates remain elevated and expect the ongoing hikes in interest to help improve demand and lower surging inflation. The Fed also lowered GDP projections for 2023 to 0.5% compared with 2.1% mentioned earlier. It anticipates inflation to continue to surge, with expectations revised to 5.6% for 2022 (from 5.4% stated earlier) and 3.1% for 2023 (versus 2.8%).
With the risks of elevated inflation and the resulting rise in interest rates, interest-sensitive sectors like housing look troubled. Additionally, the risks of geopolitical tensions are likely to continue in 2023, resulting in fears of a continued lackluster performance of the S&P 500 index. So, what should an investor do at this time?
At this time, building upon a portfolio of high-yield dividend stocks could be an excellent way to play in the stock market. The dividend-paying stocks not only offer a defensive play in a troubled market but also provide a steady income for investors amid recessions.
Why Dividend Investing?
Investing in dividend-paying stocks provides investors with a regular income stream and long-term growth potential. Investors, who do not require a regular stream of income, may choose to reinvest dividends for capital accumulation or increase wealth over the long term.
The dividend aristocrats, companies that have a history of increasing their dividends annually for the past 25 years, are the safe investment options. Sectors, including healthcare, consumer staples and utilities, are traditionally considered defensive plays and offer attractive returns to investors in the form of dividends.
However, one must be judicious in selecting stocks. The best way is to compare dividends in relation to the company’s net earnings. Companies with high dividend-yield, with a decent payout ratio and strong earnings prospects, can be rewarding investment choices for long-term returns.
Best High-Yield Dividend Stocks for 2023
With the help of the Zacks Stock Screener, we have narrowed down on five high-yield dividend stocks that sport a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
These S&P 500 stocks have a dividend yield of more than or equal to 2%, as well as a five-year historical dividend growth rate of more than 5%. The stocks have payout ratios of less than 60, reflecting enough room for dividend increases.
The above-mentioned combination is compelling for investors interested in owning well-known companies with a steady and long-term income based on stability amid volatility.
Gilead Sciences (GILD - Free Report) : The Foster City, CA-based company is a pioneer in developing drugs for the treatment of human immunodeficiency virus (HIV), liver diseases, hematology/oncology diseases and inflammation/respiratory diseases. The company was the first to bring a single-tablet regimen to market for the treatment of HIV. GILD is poised to benefit from its efforts to transition the HIV portfolio to drugs with improved long-term safety profiles. It also expects to gain from the expansion beyond antivirals into the lucrative oncology space.
Gilead has an estimated long-term earnings growth rate of 15.7%. The company pays out a quarterly dividend of 73 cents ($2.92 annualized) per share, yielding 3.29% at the current stock price. GILD’s payout ratio is 46%, with a five-year dividend growth rate of 6.89%. The company has a Zacks Rank #2 at present. (Check GILD’s dividend history here)
Gilead Sciences, Inc. Dividend Yield (TTM)
Gilead Sciences, Inc. dividend-yield-ttm | Gilead Sciences, Inc. Quote
Conagra Brands (CAG - Free Report) : The Chicago-based leading branded food company of North America has been gaining from its premium edible products, with a refined focus on innovation. Conagra has been strongly committed to innovation, which is the key to the company’s success. Prudent innovations have been helping the company to modernize its portfolio and meet consumers’ changing needs. Some of the company’s new products have been top-performing in several categories, such as toppings, plant-based protein and single-serve meals. CAG’s efficient pricing initiatives have been offering respite amid the cost headwinds.
Conagra has an estimated long-term earnings growth rate of 7%. The company pays out a quarterly dividend of 33 cents ($1.32 annualized) per share, with a 3.45% yield at the current stock price. CAG’s payout ratio is 54%, with a five-year dividend growth rate of 11.23%. The company currently has a Zacks Rank #2. (Check CAG’s dividend history here)
Conagra Brands Dividend Yield (TTM)
Conagra Brands dividend-yield-ttm | Conagra Brands Quote
Caterpillar (CAT - Free Report) : The Deerfield, IL-based company is the largest global construction and mining equipment manufacturer. It is known for its iconic yellow machines. Caterpillar’s focus on innovation, investment in digital capabilities and demand stemming from infrastructure spending and energy-transition trends should help it maintain an upbeat performance. It continues to focus on customers and the future by investing in digital capabilities, connecting assets and job sites, and developing the next generation of more productive and efficient products. CAT is funding initiatives that drive long-term growth focused on areas of expanded offerings and services, and digital initiatives like e-commerce, sustainability and electrification.
Caterpillar has an estimated long-term earnings growth rate of 12%. The Zacks Rank #2 company pays out a quarterly dividend of $1.20 ($4.80 annualized) per share, with a 2.04% yield at the current stock price. CAT’s payout ratio is 38%, with a five-year dividend growth rate of 8.94%. (Check CAT’s dividend history here)
Caterpillar Inc. Dividend Yield (TTM)
Caterpillar Inc. dividend-yield-ttm | Caterpillar Inc. Quote
Citizens Financial Group (CFG - Free Report) : Headquartered in Providence, RI, Citizens Financial is one of the largest retail bank holding companies in the United States. The company benefits from growing loans and deposits. Its focus on revenue and efficiency initiatives is another tailwind. Efforts to enhance the deposit base and a strong loan pipeline indicate balance-sheet strength. Moreover, with its robust capital position, the Zacks Rank #2 company has expanded and diversified operations through various acquisitions.
Citizens Financial pays out a quarterly dividend of 42 cents ($1.68 annualized) per share, yielding 4.21% at the current stock price. CFG’s payout ratio is 35%, with a five-year dividend growth rate of 15.2%. (Check CFG’s dividend history here)
Citizens Financial Group, Inc. Dividend Yield (TTM)
Citizens Financial Group, Inc. dividend-yield-ttm | Citizens Financial Group, Inc. Quote
NRG Energy (NRG - Free Report) : Founded in 1989, the company is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial and commercial consumers in major competitive power markets in the United States. It has financial and commercial headquarters in Princeton, NJ, and operational headquarters in Houston, TX. The company’s acquisitions, services to a wide variety of customers, focus on emission cuts and dividend policy will boost its long-term growth objectives.
NRG Energy has an estimated long-term earnings growth rate of 12.08%. The company pays out a quarterly dividend of 35 cents ($1.40 annualized) per share, with a 4.19% yield at the current stock price. NRG’s payout ratio is 23%, with a five-year dividend growth rate of 105.21%. The company currently has a Zacks Rank #2. (Check NRG’s dividend history here)
NRG Energy, Inc. Dividend Yield (TTM)
NRG Energy, Inc. dividend-yield-ttm | NRG Energy, Inc. Quote