Investors often overlook the importance of total returns. Speculating on capital gains is inevitable as a financial market participant; however, maximizing your portfolio's total return prospects makes life easier and returns more stable and predictable.
Furthermore, financial literature has proven that dividend stocks tend to outperform most market segments whenever the macroeconomic climate is uncertain. Many analysts are predicting that a 2023 recession is likely, which prompted me to take a closer look at the market with a focus on dividends to bulk up total return potential. Following my research, here are three of my favorite dividend stocks that demonstrate solid yields and dividend consistency.
Coca-Cola Co.
With 60 consecutive years of dividend growth, Coca-Cola Co. (KO, Financial) is considered a Dividend King. Investing in quality dividend stocks isn't just about scouting for yield, it's also about consistent dividend growth, and in this respect, few can match the maker of Coke.
Coca-Cola's 2.81% dividend yield is accommodated by an interest coverage ratio of 16.47, suggesting the stock has plenty of leeway to continue paying dividends on top of the interest on its debt.
Many might be concerned about the stock's elevated price-earnings ratio, which is currently at 27.42. However, I'm from the school of thought that believes higher price multiples for low-beta assets are justified. In addition, Coca-Cola's five-year net income compound annual growth rate of 16.88% phases out much of the stock's valuation risk.
In recent news, Coca-Cola beat its third-quarter earnings target by $0.05 per share. Additionally, the company's top line surged by 11% year over year, beating analysts' expectations by $600 million.
Much of Coca-Cola's recent growth remains related to its staple fizzy drink products. However, the company's pivot into newer generation products is apparent with the recent acquisitions of Innocent, Ades and BodyArmor. Coca-Cola's Costa takeover added hot drinks to its portfolio with critical geographic exposure in the United Kingdom.
Coca-Cola is considered a core holding by many investors. Its beta coefficient of 0.57x means it's 1.75 times less risky than the S&P 500. Yet, the stock's total returns have eclipsed the S&P 500's over the last five years.
Realty Income Corp
Realty Income Corp. (O, Financial) provides an exceptionally attractive compounding opportunity in my view with its incredible monthly dividend distributions. The company is structured as a real estate investment trust (REIT) which derives its income from a portfolio of approximately 7,000 rental properties. The annual dividend yield currently sits at 4.71% with an interest coverage ratio of 2.85.
Investors need to be careful with REITs whenever recession risk is elevated. However, Realty Income's dividend yield of 4.59% and its 0.79 beta coefficient mean it could survive severe cyclical drawdowns.
The REIT released its third-quarter earnings report last month, revealing an earnings per share beat of $0.02 per share and a revenue beat of $15.67 million. Moreover, the REIT's long-term trajectory remains firm, with its adjusted funds from operations growing at a compound annual growth rate of 5.1% since 1995.
A key value addition to the REIT's business model is its "key anchor" strategy. The strategy includes hosting large brands as tenants, allowing it to lure in smaller leasees at premiums.
The REIT's valuation metrics might concern many as its price-to-funds-from-operations ratio of 17.53 is worse than 67.74% of its peers. However, as previously mentioned, low-beta assets that are considered best-in-class tend to exhibit higher price multiples.
Intel Corp
Intel Corp. (INTC, Financial) has two primary advantages as a dividend income play Firstly, its business is conducive to today's consumer environment, especially with the semiconductor industry in the U.S. benefitting from the government's deglobalization efforts. And secondly, the stock hosts a magnificent dividend profile with a forward dividend yield of 5.53%, secured by an interest coverage ratio of 16.68.
Intel is considered one of the key players in the semiconductor industry. Even though it has fallen from the top of innovation in recent years, the company still holds 63.5% of the CPU market, which has allowed it to achieve economies of scale, conveyed by its gross profit margin of 46.56%. The knock-on effect of Intel's low-cost business model will enable it to leverage key relationships with corporate buyers, adding to revenue consistency.
Source: Statista
With a price-earnings ratio of merely 8.14, Intel provides a rare value opportunity in the technology sector in my view. Technology stocks' price multiples are typically high, yet Intel's valuation metrics remain suppressed due to the business troubles it has been experiencing, resulting in a more attractive valuation than 76.59% of its peers.
Lastly, the relative strength index indicates that Intel stock has fallen into a momentum pattern during the past two weeks, suggesting the market believes the stock is oversold.
Concluding thoughts
I believe dividend stocks could outperform from a total return perspective in the near-term as investors pivot strategies in 2023. The likes of Coca-Cola, Realty Income and Intel could thus provide diversified options with robust dividend portfolios and the potential for eventual capital gains once the recession ends.
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