Buy these 40 overlooked stocks offering top-tier dividend payouts that will hedge against underrated recession risk, UBS says

  • Investors have embraced risk so far in 2023, which has caused dividend stocks to lag.
  • But UBS is still calling for a recession, which should cause more defensive quality dividend stocks to outperform.
  • Here are 40 high-quality dividend-paying stocks that are trading at a 15% discount.

Dividend stocks have had an underwhelming start to the year, but UBS believes they’re poised to bounce back as high inflation and restrictive financial conditions weaken the economy.

Historically, investors have sought safety and stability from dividends during times of turbulence. In the last three recessions, dividend-paying stocks have beaten the S&P 500 by 4.5%, while high-quality dividend payers have outperformed by 7.5%, according to UBS.

And while yield-focused strategies topped the market by about 10% during a rocky 2022, UBS found that they’re lagging by 3% so far in 2023 as optimism in markets mounts. The firm also recently noted that the market’s implied probability of a recession has fallen from 80% in October to just 25% now.

3 reasons why dividend stocks will dominate in 2023

UBS says ditching dividend stocks for riskier assets is a mistake for several reasons: defensiveness is still needed, their valuations are currently attractive, and dividend growth looks enticing at a time when an earnings contraction is possible.

Although falling inflation and moderating interest rates are encouraging, price growth and rates each remain uncomfortably high. UBS strategists now think that recession risk is underpriced, which is why they’re recommending a defensive strategy that includes dividend-paying stocks.

“The risk/reward for dividend stocks also appears attractive given they should be relative winners in a number of macro scenarios including recession, sticky inflation and tighter [financial] conditions,” wrote Alastair Pinder, an equity strategist at UBS, in a February 22 note.

High-yielding dividend stocks are currently 15% to 20% cheaper than the market, Pinder noted, which is far more than the 8% discount they traded at in early 2021. Stocks with high yields have also underperformed their fundamentals by 3% in the last three months, according to UBS. 

Dividend stocks, including high-quality ones, are discounted compared to the market, as shown by the fact that its relative forward earnings multiple is below 1.


Lastly, UBS expects dividend growth to exceed earnings growth in 2023. The firm projects dividends to rise 1% year-over-year in 2023 and 10% in 2024, and Pinder added that corporate earnings could slide as much as 11% this year if there’s an economic downturn.

“S&P 500 dividend growth has been significantly less volatile than EPS and buyback growth and therefore should be more resilient next year,” Pinder wrote.

Dividend growth (in gold) has historically been much less volatile than earnings growth (in blue).


40 high-quality dividend stocks to buy

In this environment, investors would be wise to pursue quality within dividend stocks.

High-quality dividend payers offer protection from market sell-offs since they outperform in times of weakness, plus they’re heavily discounted from a valuation standpoint and have a subpar dividend payout ratio of 45% that suggests there’s upside for dividend growth, Pinder noted.

“A greater focus should be put on high-quality dividend payers given the deceleration in economic activity,” Pinder wrote.

UBS listed 40 stocks that have an expected 2023 dividend yield of at least 2%, a quality score in the top 25%, and strong projected dividend growth in the next six months. This group trades at a 15% discount to the market and has outperformed by 5.5% in the last six months, Pinder noted.

Below are the 40 high-quality dividend stocks to buy along with the ticker, market capitalization, sector, and expected 2023 dividend yield for each, according to UBS.