2 Best Stocks to Own for Passive Income in 2023

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The stock market is off to a decent start in 2023, with the S&P 500 hitting 4,000 at one point this month and the index up roughly 2% year to date as of Jan. 20. Some market analysts are predicting another correction this year, while others expect outsized gains for the year. That suggests a reasonable prediction would be for more market volatility in 2023.

If you are an investor looking for predictability in such a situation, a good place to turn is dividend stocks. Many are quite capable of delivering reliable income or boosting total return in an otherwise uncertain market.

Among the dividend stocks out there, banks are one sector poised to produce more passive income in 2023, according to an analysis by S&P Global Market Intelligence. The S&P Global analysis estimated that 16 of the 17 largest U.S. banks will raise dividends in 2023. From that group, here are the two best options for predictability this year — and beyond.

1. PNC Financial Services

PNC Financial (PNC 4.63%) is the holding company for PNC Bank, the sixth-largest bank in the country. It has long been one of the best dividend stocks in the sector and, according to the S&P Global analysis, it is expected to increase its dividend per share by 17.4% in 2023. In 2022, PNC had the highest dividend per share (which measures the portion of earnings paid out in dividends) of all the major banks at $5.75. In 2023, S&P projects PNC’s per-share dividend will climb to $6.75.

Last year I wrote about PNC having the best dividend in the banking industry and it remains my favorite bank dividend stock for 2023 and beyond. 

In its fourth-quarter earnings report, released on Jan. 18, PNC declared a $1.50 per share dividend, which is up 20% year over year. PNC raised its dividend in each of the last 12 years, even during the 2020 pandemic when banks froze or reduced their payouts. It pays out the dividend at a yield of 3.71%.

Also, PNC has a strong capital position as well as excellent earnings power from its acquisition of Banco Bilbao Vizcaya Argentaria’s U.S. banking operations in 2021, which gives it a national footprint and a still-rising interest rate environment.

Its common equity tier 1 ratio was 9.1% at the end of the fourth quarter, well above the 7.4% required minimum, including its 2.9% capital buffer. It also has a comfortable dividend payout ratio of 38.8%. It is a great candidate to continue to boost its dividend, certainly through this rocky stretch and beyond any potential recession in the near term, as banks typically thrive in recovering economies and bull markets.

2. Regions Financial

Regions Financial (RF 4.61%), the holding company for Regions Bank, was the top-performing bank stock in 2022 among those on the S&P 500. Regions stock finished the year up 2.3%, which far exceeded the S&P 500’s 19.4% drop last year. Regions is also a reliable dividend stock. This quarter, it paid out a $0.20 per-share dividend at a yield of 3.57%. The dividend is 17.6% higher than it was a year ago and Regions has boosted its annual payout every year for the past 10 years.

The S&P analysis calls for a 14.1% increase in dividend per share in 2023 — from $0.71 to $0.81 — making it one of the biggest projected gains in the industry.

Regions generated a 31% increase in net interest income year over year in the latest quarter, which was boosted by an increase in loan activity, a low deposit beta, and excellent efficiency. And like PNC, it has ample liquidity, with a common equity tier 1 ratio of 9.3% in the latest quarter, well above the 7.8% required minimum. Regions has a payout ratio of 33%.

At the Goldman Sachs U.S. Financial Services Conference back in December, CFO David Jackson Turner said he expects loan growth in 2023, and with that, higher dividend payouts. “We want to pay a fair dividend, 35% to 45% of our earnings we kind of peg to pay out to our shareholders. We’ve been at the lower end of that, frankly,” he said. A boost from the current 33% payout ratio to, say, 40% would see that dividend increase for the 11th straight year.

For investors looking to generate income or boost their total return in an uncertain year, these two high-performing bank stocks are great options. But they also stand as excellent long-term dividend growers when the economy turns the corner and interest rates still remain elevated.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, PNC Financial Services, and S&P Global. The Motley Fool has a disclosure policy.