3 Income Stocks for 2023

The New Year usually brings about changes because people make resolutions. They may try a new hobby, cut spending, lose weight, etc. Similarly, investors may direct money into new stocks or add to existing positions.

A place to look is the annual Dogs of the Dow list published at the end of the prior year. These Dow Jones Industrial Average (DJIA) stocks have the ten highest dividend yields at the end of the previous year.

The approach assumes the ten stocks are momentarily mispriced, resulting in a high dividend yield. Furthermore, the ten stocks are growing blue-chip stocks with good reputations. Therefore, they make good choices for retail investors seeking high dividend yields.

We focus on dividend yield, payout ratio, and reasonable valuation in our three picks. These three stocks make great choices for investors wanting income.

3 Income Stocks for 2023

Walgreens Boots Alliance

Walgreens Boots Alliance (WBA) has been on the Dogs of the Dow since 2020 because of its repeated elevated dividend yield. Moreover, the stock price peaked in 2015 and has been on a long downward trend since then.

The pharmacy retailer has been challenged with operational missteps, opioid lawsuits, and rising competition from e-commerce. In addition, the 2015 merger between Walgreens and Boots Alliance was arguably not well executed.

Walgreens replaced its CEO, and the new one is moving the firm into healthcare through tuck-in acquisitions. The company acquired Summit Health for primary care, Shields for specialty care, and CareCentrix for post-acute care. That said, these are minor efforts for now. However, Walgreens is performing better with rising organic sales growth and higher full-year sales guidance.

The firm consistently raises the dividend each year. Walgreens has a 47-year streak of increases and is a Dividend Aristocrat. It should become a Dividend King in three years. The forward dividend yield is ~5.3%, bolstered by an approximately 42% payout ratio.

Walgreens is trading at a valuation of about 8.1X times earnings within the range of the past five years but below the range in the past ten years. The company is reliably profitable, and investors may want this stock for income with the potential for capital appreciation.

International Business Machines

The third stock on this list is International Business Machines (IBM). It is a company that investors dislike because of many years of revenue declines. That said, in 2022, IBM has a positive total return, while many other tech stocks struggled during the bear market.

Moreover, the firm beat Q4 2022 expectations and announced it would trim its workforce by 1.5%. IBM's Software, Consulting, and Infrastructure segments all grew revenue. Cash flow rose too, and net debt is down. The CEO's strategy of focusing on hybrid cloud, software, and consulting is working. Also, divesting Kyndryl has helped with profitability and cash flow.

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IBM's stock price dropped after it released earnings, pushing the dividend yield to nearly 5% and the valuation down to 14.2X. The dividend grows very slowly because the company is deleveraging and conducting tuck-in acquisitions. That said, IBM did not cut or freeze the dividend during its challenging stretch. Moreover, IBM has paid dividends for over 100 years and is a Dividend Aristocrat.

IBM is probably fairly valued at the moment, but it is undervalued compared to its tech peers, which often trade at a much higher P/E ratio. As a result, the stock is a good choice for income investors.

Verizon Communications

Verizon Communications (VZ) is a stock that investors seeking a combination of high yield and modest dividend growth should like. The yield is nearly at an all-time high, and the stock price has dropped significantly in the past year.

Verizon is one of the largest telecommunications companies in the United States. At the end of 2022, it had 114.5 million wireless retail connections, of which 91.8 million were postpaid, and 22.7 million were prepaid. In addition, Verizon has 7.9 million broadband including 6.7 million FiOS connections.

Verizon has been spending more on capital expenditures because of its 5G rollout. The firm is trying to catch T-Mobile (TMUS) and AT&T (T) in speeds. Because of lower speeds and less geographic coverage, the firm has struggled with gaining subscribers. But the trend of flat or declining numbers recently reversed for at least one quarter. Also, Verizon is cutting capital spending and expenses, which should improve cash flow.

Currently, Verizon’s dividend yield is about 6.5%, well above the average for the broader market. It is also more than the trailing 5-year average of 4.68%. Verizon’s dividend growth rate is roughly 2% per year. But the stock is a Dividend Contender, and the dividend payout ratio is only 50%.

Verizon is undervalued based on the historical price-to-earnings (P/E) ratio. It currently trades at a forward P/E ratio of 8.6X, below the range in the past decade. Hence, Verizon is a solid dividend stock for people seeking income at a sensible price.

Disclosure: Long VZ and IBM

Disclaimer: The author is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money. 

Author Bio: Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.