Best Dividend Stocks To Beat Inflation In 2023

In a year that’s lining up to be economically uncertain, putting some safety in your portfolio is a smart move.

You might call 2023 the year of uncertainty in personal finances. There are worries about a potential recession, inflation in the price of goods and services and questions about what the Federal Reserve will do with interest rates. Near-term performance of stocks, exchange-traded funds (ETFs) and fixed-income assets is foggy.

How do you manage your portfolios in response to the uncertainty? Consider dividend stocks. Dividends provide additional cash, and while the extra money doesn’t solve inflation’s impact entirely, it does make it less painful.

“Dividend payers can help beat the market in an inflationary environment in two ways,” says R. Burns McKinney, managing director and senior portfolio manager at NFJ Investment Group. The first is that dividend stocks act like “short-duration financial instruments.” Instead of waiting for someday in the future, like with high-growth tech stocks, you get cash that you can reinvest today.

The second way is that dividend-paying companies can often grow payout faster than inflation, so they can perform better than fixed-income securities like corporate or government bonds.

Which stocks or ETFs are best ultimately depends on the risk tolerance and investment time horizon of a given investor. “In this type of environment, simply targeting companies that currently offer the highest dividend yield is not enough,” says Daniel Dusina, director of investments at Blue Chip Partners. “As inflation and tighter financial conditions hit corporations, investors should look for greater certainty that a company’s profitability, and ultimately their ability to pay an attractive dividend, will not be impaired.”

Some factors to consider are stability of the company, history of dividend payment to show reliability, dividend percentage, trend of financial performance, defensibility of the business’s industry position, valuation of the stock or ETF and risk. Here are some dividend-paying stocks and ETFs that independent financial advisors Forbes has been in touch with suggested as ones they particularly liked. Data and numbers quoted are accurate as of the time of publication.

Even at low levels, inflation destroys wealth, but at current rates it’s downright deadly. Defend yourself with dividend stocks that raise their payouts faster than inflation. Click here to download “Five Dividend Stocks to Beat Inflation,” a special report from Forbes.

Digital Realty (DLR)

McKinney likes Digital Realty, a real estate investment trust and the “largest owner of data centers.” REITs in general own income-generating real estate properties like office buildings, retail centers, rental housing, medical offices, hotels or self-storage facilities. In this case, the real estate assets are data centers, which are critical to modern business operations. By law, REITs need to pay out a minimum of 90% of taxable income out as shareholder dividends.

Digital Realty, like most REITs, trades on the New York Stock Exchange, and average daily volume over the last 12 months has been about 1.8 million shares, according to data from S&P Global Market Intelligence. With this much trading activity, liquidity is not a concern.

Digital Realty currently has a 4.5% dividend yield, and according to McKinney, has “size and scale that give it cost advantages” and trades at a “steep discount to similar names.”

Advance Auto Parts (AAP)

With hundreds of millions of vehicles in the U.S., the country is car crazed and someone has to sell the parts to keep all those autos on the road, a market worth about $300 billion annually. Robert Kalman, cofounder and senior portfolio manager at Miramar Capital, thinks Advance Auto Parts is in a good position. The current dividend yield is more than 4%, he notes, and the company also has $1.3 billion left in its stock repurchase plan, which should help bolster share prices.

“A slowing economy and higher [interest rates on car purchases] means people will keep their cars longer,” Kalman says. “The acquisition of the Die-Hard battery brand [in 2019]” helped the company see annual sales rise above $1 billion “as they move to cash in on electric and hybrid vehicles.” According to a Wall Street Journal analysis, that’s a good place to be as fully electric vehicles moved from 3.2% of all car sales in 2021 to 5.8% in 2022, so the business is on a high-growth trajectory.

Snap-on (SNA)

Another company with automotive roots to consider is Snap-on. You may have seen the company’s trucks as they drive from one facility to another, offering direct sales of tools and diagnostic equipment for professional use in the automotive, heavy equipment, marine, aviation and railway industries. With more used vehicles on the road and renewed activity in supply chains involving the last three categories, there is support for ongoing growth.

“The financial fundamentals of the business are strong with EBITDA margins over 27% leading to strong and sustainable free cash flow,” says Matt Dmytryszyn, chief investment officer at Telemus. “Free cash flow has typically been double that of dividends paid, which leaves us comfortable in Snap-On’s ability to cover and grow its current dividend, which currently equates to a 2.6% yield.”

Cisco Systems (CSCO)

Technology in 2022 was one of the worst places to invest, but bargain-hunting has helped the sector stage a respectable comeback in the first three weeks of January. Networking and communications behemoth Cisco Systems is a dominant name in technology, and it has some attractive features as a dividend-paying stock.

“The company currently offers a 3.1% dividend yield, stronger operating profitability than industry peers, and a free cash flow yield greater than 83% of the large-cap U.S. market,” says Dusina. It has more cash than debt on its balance sheet, giving it a “sound financial positioning” and, on average in each of the last 10 years, the company has increased its annual dividend by more than 10%.

Aside from being positioned for work-from-home trends, its “recently initiated transition toward a greater mix of software and subscription sales will increase customer switching costs, which results in greater higher customer retention and recurring revenue and that is not currently appreciated by the market.”

Even at low levels, inflation destroys wealth, but at current rates it’s downright deadly. Defend yourself with dividend stocks that raise their payouts faster than inflation. Click here to download “Five Dividend Stocks to Beat Inflation,” a special report from Forbes.

MiX Telematics (MIXT)

Speaking of tech, MiX Telematics is unlikely to be the first name that comes to mind, but it has an important spot in how tech supports the global supply chain as one of the biggest players in tracking vehicle fleets. The industries it serves include oil and gas, construction, utilities, supply chain, mining, public transportation and agriculture.

“Core Ebitda margins are in excess of 30%,” says Randy Baron, lead portfolio manager at Pinnacle Associates. “Subscribers are growing in the double-digit range, the company has a robust backlog and interestingly, MIXT has repurchased over one-third of its outstanding shares since going public,” so management is trying to keep share prices high. An activist investment group in the fall of 2022 suggested that in an auction situation, shares could be worth double current market levels.

Pinnacle Associates has held a position for five years in the South African company via American depositary receipts that trade in the United States. The dividend yield is 3.1%.

ExxonMobil (XOM)

ExxonMobil, one of the largest companies in the U.S., with a market capitalization of $471 billion, can also help buffer against the ill effects of inflation.

“It’s one of the few stocks to have paid a dividend for more than 100 years,” says Kimberly Birn, owner of Birn Financial, so chances are good that the descendant of John D. Rockefeller’s Standard Oil will continue to be a cash gusher for shareholders. Exxon has also raised its dividend each year for more than 40 years, making it one of the few oil companies that qualify as a dividend aristocrat.

The company’s return on equity is 30%, “significantly higher than the industry average,” and it has increased its dividend every year for the past three decades. Exxon also has a diversified portfolio of oil, gas, and other energy products, including significant investment in renewable energy sources.

Sysco (SYY)

Like companies that provide goods and services fundamental to human needs for warmth, energy and shelter, those that provide food will always have a ready market for their wares. Sysco is the “largest global distributor of food and related products to the foodservice and food-away-from-home industry,” according to Ryan P. Johnson, managing director for investments at Buckingham Advisors.

About 71% of Sysco’s revenue comes from domestic food service operations, with 17% from international and another 11% from its ownership of Sygma Network, which services chain restaurants. Its 190 U.S. distribution centers provide it a competitive advantage in getting the right food to the right place at the right time. Management has plans to grow operations faster than the overall industry during the next few years by increasing ordering and delivery flexibility.

“Valuation is relatively attractive across several metrics, trading at a slight discount to its sector whereas it has more often traded at a premium,” Johnson says, and the dividend yield of about 2.4% may be increased in February.

iShares International Select Dividend ETF (IDV)

Dr. Richard Michaud, president and CEO of Frontier Advisors, tells investors to focus on dividend ETFs rather than individual stocks. There is exposure to a broader market, so greater diversity and more stability. His says the “best advice for sustainably high income is managing your entire portfolio for that goal using an optimized multi-asset portfolio of ETFs.”

One he suggests is the iShares International Select Dividend ETF (IDV), with its current 7.3% yield, which “contains approximately 100 high dividend paying stocks from 20 different countries that would be difficult for most investors to get access to individually.”

Schwab U.S. Dividend Equity ETF (SCHD)

One other ETF worth consideration is Schwab U.S. Dividend Equity, which is designed to track as much as possible, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100 Index.

“We use it in most of our managed portfolios as it’s a large cap, value stock ETF. It currently has a very nice 3.4% dividend yield,” says Sean Burke, vice president of Kirsner Wealth Management. “It currently has a very nice 3.39% dividend payout. It has extremely low expenses of 0.06% per year.”

Did you know…?

Since 1930, dividends have provided 40% of the stock markets total returns. What’s even more impressive (and lesser known) is its outsized impact is even greater during inflationary years, an impressive 54% of shareholder gains. If you’re looking to add high quality dividend stocks to hedge against inflation, Forbes’ investment team has found 5 companies with strong fundamentals to keep growing when prices are surging. Download the report here.