For most investors, the new year brings with it new opportunity. With all three major U.S. stock indexes falling into a bear market last year, investors are hopeful that history will follow course, once again, and eventually send the broader market higher.
However, the 2022 bear market wasn’t as painful for the Dow Jones Industrial Average (^DJI) as the other major indexes. When it crossed the finish line, the Dow Jones ended 2022 lower by just 9%, which compares quite favorably to the 33% drop registered by the Nasdaq Composite. This outperformance is likely the result of the Dow’s 30 components being predominantly profitable and time-tested. During periods of uncertainty, it can be a smart move to own stakes in “boring” businesses.
The same holds true for the new year. Three high-yield Dow stocks — companies with dividend yields of at least 4% — stand out as screaming buys in 2023 and a smart way to hedge against stock market volatility and economic uncertainty.
Verizon Communications: 6.31% yield
The first high-yield Dow Jones Industrial Average stock that’s begging to be bought in the new year is telecom stock Verizon Communications (VZ -1.84%). Verizon is the highest-yielding Dow component (6.3% yield) and shouldn’t have any trouble sustaining its inflation-fighting dividend with a payout ratio of a little over 50%.
Arguably the best thing about telecom stocks is their predictability. Over time, access to wireless services and smartphones have become basic necessities. Not even recessions or economic slowdowns have led to high retail churn rates. In other words, Verizon tends to generate predictable cash flow every year — and Wall Street loves predictability.
Through at least the midpoint of the decade, Verizon’s greatest growth opportunity will come from 5G. Verizon and its peers have been spending billions of dollars upgrading their wireless infrastructure to support 5G download speeds. The expectation is for this investment to yield a persistent device upgrade cycle that leads to a big uptick in data consumption. Verizon’s wireless segment generates its best margins from data. Not surprisingly, wireless revenue surged 10% for the company during the September-ended quarter.
However, the unsung hero for Verizon that gets little attention might be its broadband operations. Offering internet access to residential and enterprise customers isn’t the growth trend it was two decades ago. However, big investments in C-band spectrum should allow Verizon to reach more than 50 million households and 14 million businesses with its 5G broadband service by the end of 2025. That means more cash flow and higher-margin bundling opportunities.
Lastly, Verizon is trading at roughly 8 times Wall Street’s consensus earnings forecast for 2023. Though telecom stocks don’t command large earnings multiples due to their relatively slow organic growth rates, they do offer a relatively safe floor given their predictable cash flow and profits. A price-to-earnings ratio of 8 provides quite a bit of safety amid a turbulent market.
Intel: 4.98% yield
The second high-yield Dow Jones stock that’s a screaming buy in 2023 is semiconductor giant Intel (INTC 1.39%). Historically speaking, Intel’s roughly 5% yield over the past four months is the highest it’s been in four decades.
If there’s a knock against Intel, it’s that semiconductor stocks are cyclical, and therefore prone to order or demand weakness when U.S. and global economic growth falters. But between this concern and worries about Advanced Micro Devices eating into Intel’s central processing unit (CPU) market share, Intel’s share price looks to be significantly de-risked.
To address the elephant in the room, AMD has, indeed, been taking personal computer (PC), mobile, and data-center server CPU share from Intel. However, the magnitude of these losses over the past couple of years isn’t as big as skeptics portray. Intel still holds a commanding lead over AMD in all three categories, and even managed to regain share in the PC arena during the third quarter. The point being that Intel can count on its CPU segments to generate copious amount of cash flow, which can be reinvested in high-growth initiatives or its capital-return program.
One of the more interesting moves made by Intel of late is the initial public offering of autonomous vehicle company Mobileye Global (MBLY -0.84%). Intel purchased Mobileye for a little north of $15 billion in 2017, and it’s consistently been the company’s fastest-growing operating segment — $450 million in sales (up 38%) in the third quarter. Mobileye’s market cap is now nearly $27 billion as a publicly traded company, and Intel remains the majority shareholder.
Additionally, Intel’s foundry operations are expected to become a bright spot within the next two years. Last year, Intel broke ground on two chip fabrication plants in Ohio. With President Joe Biden signing the CHIPS and Science Act into law in August 2022, nearly $53 billion in subsidies became available to chipmakers like Intel to help boost domestic manufacturing and chip design.
Relative to its book value, Intel is as cheap as it’s ever been.
Walgreens Boots Alliance: 5.28% yield
The third high-yield Dow stock that stands out as a screaming buy in 2023 is pharmacy chain Walgreens Boots Alliance (WBA 1.14%). Like Intel, Walgreens is sporting its highest yield in about four decades (5.3%). Further, it’s increased its base annual payout for a jaw-dropping 47 consecutive years. Suffice to say, this dividend is rock solid.
While it’s not unusual for healthcare stocks to outperform during periods of heightened volatility, Walgreens has been something of an exception to the rule. Since a significant portion of its revenue is tied to its brick-and-mortar stores, Walgreens struggled mightily when lockdowns during the initial stages of the pandemic slowed its foot traffic to a crawl. The good news is that the worst of the pandemic appears to be over, and Walgreens has been working on operating changes for years designed to make it more efficient and attractive to shoppers.
As you can imagine, cost-cutting has been on the docket. Walgreens has shed more than $2 billion in annual operating expenses, as well as sold off its drug wholesale business to AmerisourceBergen. This sale raised billions of dollars that Walgreens used to improve its financial flexibility.
However, a far more important change has been the company’s emphasis on direct-to-consumer sales. Even though its physical locations will continue to bring in most of its revenue, the COVID-19 pandemic was a reminder for the company that convenience is king in today’s retail environment. With a renewed emphasis on digitalization, Walgreens Boots Alliance should be able to sustain double-digit digital sales growth.
The other big development for Walgreens is its majority investment in, and partnership with, VillageMD. The duo has opened 200 full-service health clinics co-located at Walgreens stores, as of Nov. 30, 2022. The goal is to have 1,000 of these physician-staffed clinics open in more than 30 U.S. markets by the end of 2027. Since most grassroots health clinics can only handle simple procedures, such as a vaccinations, Walgreens’ full-service clinics can act as a tool to drive repeat visits at the local level.
Currently valued at less than 8 times Wall Street’s consensus earnings for fiscal 2023, Walgreens Boots Alliance looks to have a safe floor with plenty of upside potential.