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Sometimes things just don’t go as expected. Following a steady uptrend in 2021 that saw the benchmark S&P 500 (^GSPC -1.56%) endure no larger than a 5% correction, 2022 featured a bear market for the broad-based index and a peak decline of 28%.
Though bear markets can be unnerving in the short run, they’re historically a great time for investors to put their money to work. Specifically, it can be an ideal opportunity to buy dividend stocks.
Image source: Getty Images.
The simple answer to “Why dividend stocks?” is that they are almost always profitable on a recurring basis and have previously demonstrated their ability to navigate downturns. To boot, income stocks have historically outperformed companies that don’t offer a payout. In short, they’re just the types of stocks investors should want to own during a bear market.
The good news is the S&P 500 is absolutely packed with dividend-paying companies. More than four dozen of these income stocks are doling out an inflation-fighting yield of at least 4%. What follows are three of the best high-yield S&P 500 stocks that are screaming buys in 2023.
The first supercharged dividend stock that’s a no-brainer buy in the new year is telecom juggernaut Verizon Communications (VZ -2.15%). Verizon’s current yield of 6.2% marks its highest level since the early 2010s.
Since the end of the Great Recession, investors have gravitated to growth stocks. With the expansionary heyday of the U.S. telecom industry long since gone, Verizon has been somewhat forgotten. But I’d expect that to change in a big way in 2023.
Even with a number of indicators suggesting a growing likelihood of a U.S. recession this year, telecom stocks are well protected from an economic downturn. Consumers and businesses have treated wireless access and their smartphones as basic necessity goods and services. As such, churn rates are unlikely to climb much, even if the U.S. economy weakens in 2023.
But the far bigger catalyst for Verizon is the much-anticipated upgrade to 5G wireless download speeds. It’s been about a decade since wireless providers last meaningfully improved download speeds. The expectation is that we’ll see a pretty consistent device upgrade cycle over the next couple of years.
Keep in mind that it’ll also take time for wireless providers like Verizon to expand the reach of its 5G wireless infrastructure. The key point is that 5G should drive increased data consumption, which is where Verizon rakes in its operating cash flow.
Another reason to be optimistic about Verizon’s outlook is the steady strength of its broadband business. Despite broadband not being anywhere near the growth story it was two decades ago, it’s an important tool Verizon can use to bolster its operating cash flow and lift its margins by promoting bundling opportunities.
Buying shares of Verizon at a very reasonable multiple of 8 times Wall Street’s forecast earnings for 2023 would be a smart move.
The second high-yield S&P 500 dividend stock that stands out as a screaming buy in 2023 is tobacco stock Philip Morris International (PM -1.95%).
If you thought telecom stocks were unloved, take a closer look at the tobacco industry. Over decades, a number of developed countries have clamped down on the advertising and marketing capabilities of tobacco companies. But in spite of these challenges, Philip Morris has catalysts that it can lean on to move the needle for its shareholders.
Arguably the most-important tailwind for Philip Morris is its pricing power. Tobacco contains nicotine, which is an addictive chemical. Even though tobacco companies have seen the percentage of adults smoking cigarettes decline over time in some key markets, they’ve been able to more than offset this volume weakness with price increases.
Philip Morris International’s appeal is also a reflection of its geographic diversity. While it doesn’t operate in the U.S., Philip Morris sells its products — including exceptionally popular premium brand Marlboro — in more than 180 countries around the globe. This means that if it’s facing legislative pushback or volume weakness in certain developed countries, it can lean on its emerging markets, where tobacco products are still viewed as somewhat of a luxury.
What’s more, Philip Morris is using its proverbial binoculars to look to the future. Specifically, the company’s IQOS heated tobacco system represents an alternative way for its customers to consume nicotine products without smoking cigarettes. Through the first nine months of 2022, Philip Morris’s heated tobacco market share jumped 120 basis points to 7.6% in the markets it operates in. Further, revenue from smoke-free products surpassed 30% of net sales.
Valued at less than 18 times Wall Street’s forecast earnings this year, and sporting a 5% yield, Philip Morris looks like a rock-solid buy for income-seeking investors.
Image source: Getty Images.
The third and final high-yield S&P 500 stock that’s a screaming buy in 2023 is media company Paramount Global (PARA -3.00%). Though Paramount has the “lowest” yield of the group at 4.8%, this is still nearly triple the yield of the S&P 500.
The biggest challenge for Paramount Global entering 2023 is overcoming the fear that the U.S. will dip into a recession. Advertisers are incredibly fickle with their spending when the slightest hint of economic weakness enters the picture — and when advertising revenue falls, it drags down the performance of traditional media assets. However, this temporary ad weakness is an opportunity for investors, not a reason to head for the exit.
As I outlined earlier this month, advertising is an industry that spends far more time in the sun than most folks might realize. Despite recessions being an inevitable part of the economic cycle, expansions typically last for years. Buying into ad-driven stocks during bear markets has historically been a good move.
This year, Paramount is placing a lot of its focus on its streaming services. Through the end of September, the company’s direct-to-consumer segment had signed up 67 million subscribers. That’s up 20 million from the prior-year period.
While streaming service Paramount+ has ample pricing power (i.e., expect a price hike this year), it’s the United States’ leading free ad-supported streaming service, Pluto TV, that might be Paramount’s top growth driver. If the U.S. economy were to worsen, “free” is a tough price to beat. Advertisers are well aware of the lure Pluto TV brings to the table for cost-conscious viewers.
If Paramount Global is successful in narrowing the operating losses associated with its rapidly growing streaming segment this year, we could be looking at a substantial rebound candidate.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International and Verizon Communications. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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