20 Best Dividend Stocks Investors Can Add to Their Watchlist In 2023

There are more than 6,000 stocks listed on U.S. exchanges. So, it might be pretty overwhelming for a novice investor to identify companies that have the potential to generate steady gains over the long term. But there are a few strategies you can implement while purchasing stocks. 

In the last decade, a low-interest rate environment and an elongated bull run drove prices of growth stocks significantly higher. Companies classified as growth stocks increased their revenue and profit margins much faster than the broader markets. 

Growth stocks tend to have a high beta, suggesting they may deliver outsized gains to investors in a bull market but may underperform when market sentiment turns bearish. Several growth stocks lost significant momentum in 2022 due to rising interest rates, inflation, supply chain disruptions, and a challenging macroeconomic environment.

Value investing is also a popular investment strategy. Here, you identify companies trading at a lower multiple compared to their intrinsic value. Typically, value stocks are companies that enjoy strong economic moats and are equipped with solid fundamentals, but trade at a discount. 

Another extremely popular investment strategy is dividend investing. 

Here you buy shares of companies that pay investors a dividend. A profitable company can reinvest cash flows to expand its base of wealth-creating assets. Alternatively, it can use profits to reduce its debt or decide to enhance shareholder value by paying investors a dividend. 

Dividend-paying stocks are attractive to income-seeking investors and can be used to create a predictable stream of passive income. Let's take a detailed look at what dividend investing is, the metrics used to identify dividend stocks, and the top dividend stocks you can buy right now. 

What are dividend stocks?

Dividend investing has gained widespread acceptance globally as it enables individuals to create an alternate source of income. Further, over the long term, investors can also benefit from capital gains. You can either choose to withdraw the dividends or reinvest the payouts to benefit from compounded gains. 

For example, shares of consumer giant Coca-Cola (NYSE: KO) have gained 146% in the last 20 years. However, after adjusting for dividends, total returns stand at close to 340%. 

Dividend-paying companies need to generate consistent profits to sustain their payouts. Generally, these companies are part of mature industries, allowing them to generate cash flows across various business cycles. 

But not every stock that pays a dividend may turn out to be a good investment. It's advisable to look at various other metrics to help you make an investment decision. 

What is a stock dividend, and how does it differ from a cash dividend?

There are two ways a company pays dividends to investors. It might pay investors a cash dividend or a stock dividend, or a combination of the two. A majority of the companies pay investors a cash dividend. For example, Apple (NASDAQ: AAPL) pays investors a cash dividend of $0.92 per share. 

If you own 100 Apple shares, you will receive $92 annually in the form of cash dividends. These dividends can be withdrawn or reinvested to purchase additional shares of Apple. 

But a few companies issue dividends in the form of stock. Here, the company pays investors with additional shares that can be liquidated or sold later. Generally, stock dividends are issued by small-cap companies that are aiming to increase trading liquidity and the number of outstanding shares. 

How to identify the best dividend stocks in 2023?

Companies that pay dividends may be part of mature industries allowing them to generate consistent cash flows. Dividend-paying stocks may also have a lower beta making them top bets for retirees or investors with a lower risk appetite. 

But, as is the case with most other investments, there are certain risks associated with dividend stocks. Therefore, creating a portfolio of dividend stocks is essential to help you derive substantial gains over the long term. Let's look at some metrics you can analyze to identify quality dividend stocks. These metrics will help you recognize potential red flags associated with dividend-paying stocks.  

Dividend yield

The most attractive metric for income-seeking equity investors is the dividend yield. Also known as the forward yield, the metric is a function of the company's stock price. So, if you purchase 100 shares of Chevron (NYSE: CVX), you will have to invest around $14,800, given each stock is priced at $148 at the time of writing. Chevron pays investors dividends of $5.68 per share each year, so you will generate $568 in annual dividends. 

Chevron has a dividend yield of 3.83% at the current stock price (Annual dividends/Total Investment*100). So, if Chevron's stock falls to $100, its dividend yield will increase to 5.68%. 

Alternatively, the yield will drop to 2.84% if the stock price increases to $200. 

While most dividends are paid on a quarterly basis, there are a few companies that pay monthly dividends. These monthly dividend stocks are predominantly real estate investment trusts and have to distribute 90% of profits as dividends. 

Chevron's tasty dividend yield is much higher than bond rates, which are hovering at record lows in recent years. Investors can choose to withdraw the dividends or reinvest them to purchase additional Chevron shares and benefit from higher payouts in the future. 

Payout ratio

A company's payout ratio is another crucial metric investors should watch out for while evaluating dividend stocks. This ratio or multiple is calculated as a percentage of a company's earnings. For example, Pepsi pays investors a dividend of $4.60 per share, translating to a dividend yield of 2.71%. In the last year, Pepsi reported adjusted earnings of $6.26 per share, indicating a payout ratio of 73%. 

A lower payout ratio suggests the company has enough room to utilize profits to lower debt, reinvest in capital expenditures or even increase dividend payouts. Pepsi's payout ratio is sustainable given it has increased dividend payments yearly for 50 consecutive years. 

Total capital gains

You can calculate capital gains by assessing a company's share price increases and dividend yield. If a company's stock price rises 10% in a particular year and if it also offered investors a forward yield of 2.5%, total returns will be 12.5%. 

Ideally, a dividend-paying stock should generate market-beating returns, thereby creating massive wealth for investors over time.

Earnings per share

The earnings per share or EPS is calculated by dividing a company's net profits by the number of outstanding shares. It derives the profits a company generates for each share. So, if a company's profits are $1 billion and it has 100 million outstanding shares, its earnings per share are $10. 

Ideally, a company's earnings per share should expand over time, allowing it to increase dividend payments as well. 

Analysts tracking Pepsi expect its shares to rise at an annual rate of 7.5% in the next five years, indicating that dividends should continue to increase. 

Total cash and debt balance

Investors need to consider the amount of debt a company has on its balance sheet. The company needs to generate enough cash flows to make interest payments and consistently lower its debt while paying shareholders dividends. 

In case macroeconomic conditions turn challenging, it should also have enough cash on its books to support temporary losses or a decline in revenue. 

Economic cycles are inevitable, and a robust balance sheet will help a company tide over an uncertain and volatile environment. 

Investors need to avoid the dividend yield trap

Investors who have just begun investing in the stock market might associate high dividend-paying stocks as attractive investment opportunities. While you can use the dividend yield as a prominent filter, it's advisable to look at the reasons for the high payout. 

We know the dividend yield is inversely related to a company's stock price. So, investors should investigate the reasons behind the decline in share prices and evaluate if the sell-off is related to weak fundamentals or market-wide factors. 

Telecom heavyweight AT&T pays investors a tasty forward yield of 5.34%, given its annual dividends of $1.11 per share. But AT&T's stock has declined by 23% in the last ten years. After accounting for dividends, its total returns stand at 61%, trailing the S&P 500 index by a significant margin. 

Investors should avoid buying stocks just based on a high yield. A company with a significantly higher yield than peers may be a red flag. It's imperative to analyze other factors such as the payout ratio, earnings expansion, and the strength of the financial statements. 

It's safer to place your bets on companies with a lower dividend yield but that have also increased these payouts consistently, reflecting the strength of their business model. There is also a chance for companies with high yields to roll back or suspend dividend payouts if markets turn volatile. 

Dividend payouts are not a guarantee

Investors should note that, unlike interest payments, dividends are not an obligation and can be suspended at any time. When a company starts dividend payments, it is rewarded by the equity market. Alternatively, share prices are decimated if these payouts are suspended or reduced. 

During the bear market of 2020, several oil-producing companies, such as Schlumberger, cut dividends by 75%. In addition, the COVID-19 pandemic also impacted companies such as Bed Bath & Beyond and General Motors, which suspended dividend payments indefinitely. 

Dividends are paid only if a company can generate profits. So, those wrestling with a higher cost structure, negative profit margins, or falling revenue growth might choose to stop dividend payments until their fundamentals improve. 

Considering these factors, let's see the top dividend stocks investors should buy in 2023.

Dividend Aristocrats

Coca-Cola

One of the most famous brands in the world, Coca-Cola is valued at $270 billion by market cap. The beverage giant's brand value protects it from cost pressures making it a top bet in an inflationary environment. The company has increased dividends for 60 consecutive years and currently offers investors a forward yield of 2.9%. 

In the last ten years, shares of Coca-Cola have risen by 61%. After accounting for dividends, total returns stand at 121%. 

Coca-Cola's stellar market share is complemented by its robust distribution networks, making it a popular brand globally. Further, its free cash flow to sales ratio is around 30% making it one of the most profitable blue-chip stocks on the planet. 

Colgate-Palmolive

Another famous brand that makes the list is Colgate-Palmolive (NYSE: CL), which has a comprehensive portfolio of products across categories. It generates around 70% of sales from international markets, and its top-line grew by 4.5% year-over-year to $17.4 billion in 2021. 

Colgate began paying investors a dividend in 1895 and has increased payouts every year since 1963. It currently pays annual dividends of $1.88 per share, indicating a yield of 2.4%. Colgate's payout ratio is well below 60%, which suggests it should continue to increase dividends going forward. 

The stock is not cheap at a forward price to earnings multiple of 23x. While it is a safe investment, Colgate-Palmolive has trailed the S&P 500 in recent years. Since July 2022, shares of Colgate-Palmolive have returned 91.5%, compared to the S&P 500 gains of 257%. 

Procter & Gamble

Valued at $345 billion by market cap, Procter & Gamble (NYSE: PG) pays annual dividends of $3.65 per share, suggesting a yield of 2.6%. In the last ten years, its wide economic moat has allowed the company to increase annual dividends from $2.14 per share. 

In fiscal 2021 (ended in June), Procter & Gamble's sales stood at $76 billion, while its operating margin was a healthy 23.6%. Due to its impressive profit margins, the consumer goods giant has some room to absorb costs due to rising commodity prices. 

Analysts tracking the stock expect shares to rise by more than 12% in the next year, given consensus price target estimates. 

3M

An industrial conglomerate, 3M (NYSE: MMM) has raised dividend payouts for 64 consecutive years. It has operations across verticals, including healthcare, transportation, automotive, construction, and electronics. In 2021, its sales grew 10% year-over-year to $35.3 billion on the back of strong demand for healthcare products. 

3M is not immune to the impact of inflation and has also been hit by supply chain disruptions, driving its stock lower by 31% in the last year. However, the drawdown in share prices has increased its forward yield to a tasty 4.4%. 

3M stock is valued at 11 times forward earnings which is quite reasonable given its dividend yield and improving profit margins. 

Walmart

The final stock on this list of Dividend Aristocrats is Walmart (NYSE: WMT), a company that thrived amid COVID-19. However, the ongoing pullback in the equity market has dragged shares of the discount retailer lower by 25% from all-time highs. 

In fiscal 2021 (ended in January), Walmart's sales rose by 7.5% year-over-year. Valued at $335 billion by market cap, the retail behemoth is forecast to report almost $600 billion in sales in fiscal 2023. 

Last year, its free cash flow stood at $11.1 billion, allowing Walmart to distribute more than $6 billion in dividends. It has raised dividends each year since 1974 and provides investors a forward yield of 1.9%. 

Over the years, Walmart has successfully squeezed costs and passed along product savings to consumers, a trend likely to continue in 2023.

High-dividend stocks part of the energy sector

Investors looking for higher dividend-paying stocks can consider buying shares of energy companies. Rising oil prices drove share prices of energy stocks higher in 2022 while allowing them to increase dividends significantly.

Chevron

Last year, Warren Buffett's Berkshire Hathaway increased holdings in Chevron. According to SEC filings, Berkshire Hathaway purchased 121 million shares of Chevron in the first three months of 2022.

Chevron offers investors a dividend yield of almost 4% and trades at just 8.5x operating cash flows. One of the most prominent players in the energy sector, Chevron is an integrated company and reported a free cash flow of $21 billion in 2021. 

Exxon Mobil

A company that offers investors a yield of 4%, Exxon Mobil (NYSE: XOM) has an enviable track record of dividend payouts. It has increased dividends for 39 consecutive years, and rising oil prices have allowed Exxon to reduce its debt and strengthen its balance sheet. 

It recently announced a share buyback program amounting to $30 billion, which should improve its earnings per share over time. 

Shares of Exxon Mobil remain attractive despite a 40% gain in the last year. The stock is valued at 8x forward earnings which is very reasonable given the potential for earnings expansion and an enticing dividend yield. 

Analysts tracking Exxon Mobil expect the stock to rise almost 18% in the next year. 

Enbridge

A Canada-based midstream company, Enbridge (NYSE: ENB) offers investors a forward yield of 6.34%. Enbridge has raised dividends for 27 consecutive years. Enbridge's dividends increased by 10% annually in the last ten years due to its investment-grade balance sheet and stable cash flows.

Enbridge emphasized it is generating $2 billion in excess cash flow after it pays investors a dividend and allocates capital for investment plans. Its payout ratio is around 65% which is quite sustainable. 

Enbridge's fee-based business model makes it relatively immune to commodity prices. Around 84% of its EBITDA is backed by long-term contracts, allowing it to generate steady cash flows across business cycles. Enbridge is also expanding its renewable energy investments, and this vertical accounts for 4% of total EBITDA. 

Technology stocks that pay a dividend

Broadcom

Broadcom (NASDAQ: AVGO) is a high-growth technology stock that also pays investors a juicy dividend. Broadcom has increased dividends annually by 39% in the last ten years. Its quarterly dividend per share has risen to $4.10 from $0.15 per share in July 2012. So, Broadcom offers investors a forward yield of 3.2%. Broadcom has also returned 1,830% in dividend-adjusted returns in the last decade. 

Broadcom is part of the semiconductor business, which is a high-margin industry. In its most recent quarter, semiconductor sales rose by 29%, while overall revenue growth was lower at 23%. Its free cash flows surged 21% year-over-year to $4.16 billion, indicating a payout ratio of less than 50%. 

Broadcom has diversified its revenue base through several acquisitions in recent years. It also announced a $61 billion acquisition of VMware, a cloud-based software company that operates in the network virtualization segment. The acquisition will ensure Broadcom's software business will account for 50% of total sales once the deal is completed. 

American Tower

A technology infrastructure real estate investment trust, American Tower (NYSE:AMT), offers investors a dividend yield of 2.2%. In addition to a data center business, American Tower operates cell tower platforms capitalizing on technology trends such as 5G. 

The capacity of its tower assets and data centers are leased to several enterprises under long-term lease agreements. These agreements allow American Tower to generate cash flows in good times and bad. American Tower's payout ratio is just over 50%, and the rest of its cash flows are used to expand its base of cash-generating assets. 

In the last ten years, shares of American Tower have risen by 347% after adjusting for dividends, easily outpacing the S&P 500 index. 

Verizon

Another stock from Warren Buffett's stable is Verizon (NYSE: VZ), which offers investors a dividend yield of 5.8%. Verizon is well poised to benefit from the shift towards 5G and has allocated over $45 billion to license bandwidth that carries these signals. Its broadband customers will also have access to high-speed internet once the transition to 5G is complete. 

Its annual revenue is forecast to rise to $137 billion in 2022, allowing the company to end the year with operating cash flows of $36 billion. With a dividend payout ratio of 49%, Verizon has increased dividends for 18 consecutive years. 

A high dividend paying stock, Verizon is trading at less than ten times forward sales. Analysts expect shares to rise by nearly 40% in the next 12 months. 

Qualcomm

Down 18% from all-time highs, Qualcomm (NASDAQ: QCOM) is valued at $175 billion by market cap. Qualcomm is engaged in developing smartphone chips, a key revenue driver for the company. However, it's now diversifying its revenue base away from smartphones. 

Its automotive business should allow Qualcomm to gain traction in the smart-car industry and accelerate innovation in the autonomous driving vertical. 

In the most recent quarter, the IoT (internet of things) segment was Qualcomm's fastest growing business as sales were up 61% compared to the year-ago period. Qualcomm's dividend yield stands at 2%, and it's trading at a discount of 30% compared to average price target estimates. 

Texas Instruments

Texas Instruments (NASDAQ: TXN), another semiconductor company, is the final tech stock on this dividend list. Since July 2012, Texas Instruments shares have been up a monstrous 693%. Yet, despite these market-thumping gains, the company sports a forward yield of 2.8%. 

Since 2004, it has increased dividends annually by 25% while maintaining an average payout ratio of 53%. 

Texas Instruments is trading at 16x operating cash flow and a forward price to earnings multiple of 18.3x. The stock trades at a discount of 12% to average price target estimates. 

Renewables & Utilities for dividend investors

Companies operating in the renewables and utilities sectors can be considered recession-proof. These companies provide essential services, and demand remains stable over time. Here, we look at some of the high dividend-paying stocks part of the renewables and utilities segment. 

NextEra Energy 

Valued at a market cap of $160 billion, NextEra Energy (NYSE: NEE) is the largest renewable energy company in the world. It pays investors dividends of $1.62 per share each year, suggesting a yield of 2%. 

In Q2 of 2022, NextEra's adjusted earnings stood at $1.6 billion, or $0.81per share, an increase of 14% year-over-year. A key driver of the company's earnings growth was its renewable-energy and storage businesses. NextEra added two gigawatts of renewable and storage development projects to its backlog in Q2. 

It expects to end 2022 with earnings between $2.80 per share and $2.90 per share, an increase of 12% at the midpoint guidance. Further, earnings are forecast between $3.45 per share and $3.70 per share by 2025. NextEra expects to increase dividends by 10% annually through 2024 due to its solid earnings expansion. 

Brookfield Renewable Partners

Shares of Brookfield Renewable Partners (NYSE: BEP) have surged by 352% since July 2012 and currently provide shareholders a forward yield of 3.5%. These payouts have grown at an annual rate of 6% in the last nine years. 

Brookfield Renewable has hydro, wind, and solar facilities with a combined capacity of 21 gigawatts of power. It has a pipeline to increase production capacity to 69 gigawatts. Due to its rising capital expenditures, the company is optimistic about generating annual returns of 15% to investors over the long term. 

Clearway Energy

Another stock with a forward yield of more than 4% is Clearway Energy (NYSE: CWEN). The mid-cap utility company has returned 141% to investors in the last five years. It also expects to increase dividends by 7% annually through 2026. 

To increase cash flows and support higher dividend payments, Clearway disclosed its intention to acquire a portfolio of wind energy projects in a cash-and-debt deal valued at $415 million. 

The acquisition will provide Clearway Energy access to five utility-scale wind farms in three states with a power generating capacity of 413 megawatts. 

Brookfield Infrastructure Partners

A company valued at a market cap of $18 billion, Brookfield Infrastructure Partners (NYSE: BIP) has a forward dividend yield of 3.7%. A well-diversified company, BIP has infrastructure assets across verticals such as midstream, utilities, and transportation, among others. 

Since 2009, Brookfield Infrastructure has increased dividends at an annual rate of 10%. It now expects to increase dividends annually between 5% and 9% in the future. Around 44% of its funds from operations are derived from North America, followed by South America at 19%, Asia-Pacific at 19%, and Europe at 18%. 

In the last decade, BIP has returned 382% to investors, and the stock is trading at a discount of 50% compared to price target estimates. 

American Water Works

The final utility stock on the list is American Water Works (NYSE: AWK), which provides investors with a forward yield of 1.8%. It is the largest publicly traded water and waste utility company in the U.S. 

In 2022, the company expects adjusted earnings between $4.39 and $4.49 per share, indicating the stock is valued at 33.5x, which is quite steep. In addition, its earnings are forecast to expand between 7% and 9% through 2026, allowing American Water Works to increase dividends by a similar margin each year. 

Blue-chip banking stocks that pay a dividend

While banks are part of a cyclical industry, they remain important pillars of an economy. Here, we look at two blue-chip banking stocks with a handsome dividend payout. 

JPMorgan

One of the largest banks in the world, JPMorgan (NYSE: JPM), is wrestling with multiple near-term headwinds. Its earnings in Q2 stood at $3.7 billion, the lowest in five quarters, primarily due to lower revenue from its investment banking segment. 

Compared to the last two years, just a handful of companies went public in the first six months of 2022, driving investment banking sales lower by $2.1 billion year-over-year. However, a hawkish regulatory environment will offset this as the Fed will continue to focus on interest rate hikes. 

In Q2, JPMorgan's net interest income was $15.2 billion, an increase of $1.3 billion sequentially. In 2022, net interest income is forecast at $58 billion, up from its earlier estimate of $56 billion. 

The company's earnings expansion will support dividend increases, driving the forward yield higher from 3.5% currently. 

Goldman Sachs

The final dividend stock on the list is Goldman Sachs (NYSE: GS), which offers shareholders a forward yield of 2.5%. The slowdown in investment banking activity dragged earnings for Goldman Sachs lower by 48% in Q2. However, its fixed income trading revenue surged 55% year-over-year in the quarter. Further, total trading revenue rose by 32% to $6.5 billion in Q2 of 2022, accounting for more than 50% of total sales. 

Goldman Sachs has partnered with Wall Street stalwarts, including Apple and General Motors, in the credit cards business. In the June quarter, strong credit card sales increased consumer banking revenue by 67% year-over-year. 

While shares of Goldman Sachs are down 22% from all-time highs, it has returned close to 300% to investors since July 2012. 

The final takeaway

The stocks covered in this article are just a few examples of fundamentally strong companies with an attractive dividend yield. While building a portfolio of dividend stocks, it's advisable to pick companies across sectors to diversify your investments and lower overall risks. 

It's also important to remember when you include dividend payouts with capital gains, total returns are compounded, allowing you to outpace the broader markets comfortably. 

Frequently asked questions

Are dividend stocks good for inflation?

Quality dividend stocks may help you beat inflation consistently. 

Are dividend stocks recession-proof?

Most dividend stocks are not recession-proof. 

Are dividend stocks good for retirement?

Dividend stocks may allow retirees to generate a passive stream of recurring income. 

What dividend stocks should I invest in?

Identifying companies with strong balance sheets and stable cash flows is important. 

What dividend stocks pay you monthly?

Generally, real estate investment trusts (REITs) pay investors a monthly dividend. 

How is dividend yield calculated?

A dividend yield is calculated by dividing a company's share price by its annual dividend payout. 

Are dividend stocks value stocks?

A dividend-paying stock may be a value or a growth stock. 

Can dividend stocks replace bonds?

Dividend stocks -- like equities -- are a high-risk instrument and can't replace bonds for those with a lower risk profile. 

Is a high dividend yield always good?

No, a high dividend yield may not always be a good bet. 

When to sell dividend stocks?

When the fundamentals of a company change drastically, it might be time to sell the stock.