The collapse and government takeover of Silicon Valley Bank and Signature Bank reminded people about the risks of investing. The stock market plunged in response.
The banks were too highly concentrated in tech startups and cryptocurrency businesses, both riskier asset classes that are best owned in small amounts. In addition, the banks were not sufficiently diversified across their asset bases and deposits. It’s an excellent lesson to investors about diversification and reducing risk to a more comfortable level.
Warren Buffett Likes Volatility
But the bear market of 2022, followed by the market turmoil in early 2023, is an opportunity for brave investors. Sometimes, the best long-term returns occur when the market fluctuates wildly. To quote Warren Buffett, the Oracle of Omaha,
“The true investor welcomes volatility…a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.”
It is probably not wise to argue with Buffett. Hence, along those lines, we look for high-quality stocks returning cash to shareholders. Companies that pay dividends can provide solid long-term returns. Dividends are essential because they provide a significant percentage of returns, especially during bear markets.
Below are the 5 best long-term dividend stocks in 2023 with high quality.
5 Best Long-Term Dividend Stocks in 2023
The number one stock on our list of best long-term dividend stocks is Microsoft (MSFT), the diversified software and hardware conglomerate. Buy and hold Microsoft investors know about the strengths of this stock.
The firm has its hand in many computing technologies for businesses and consumers. Many people know about the company from its Windows or Office software. But the company also sells Xbox, Azure cloud services, developer tools, server tools, databases, etc. More recently, it has brought out ChatGPT with Bing.
The wide range of businesses has led to outsize profits and substantial cash balances. As a result, investors have made Microsoft the second-largest company by market capitalization, with a more than $2.0 trillion value.
Despite recession fears, Microsoft’s characteristics have caused investors to bid up the stock price in 2023. Moreover, the firm has paid a growing dividend for the past 20 years. The stock only yields about 1.0%, but the dividend safety is really high, with an A+ quality grade and a payout ratio of only ~29%. In addition, Microsoft is one of only three companies with an AAA-rated balance sheet.
Currently, there is little reason why Microsoft should not continue increasing the dividend and attain Dividend Aristocrat status.
- Ticker: MSFT
- Market Cap: $2.08 trillion
- Annual Dividend Rate (FWD) Per Share: $2.72
- Dividend Yield: 0.97%
Procter & Gamble
A stock that every dividend investor should keep an eye on is Procter & Gamble (PG). Almost everyone buys one of its products. It has 21 brands with $1+ billion in sales. Check your laundry room or bathroom, and you will likely find a product from Procter & Gamble. The company’s products include Tide, Pantene, Oil of Olay, Old Spice, Secret, Gillette, Pampers, Swiffer, Vicks, etc.
There are a few reasons why Procter & Gamble is on our list of best long-term dividend stocks for 2023:
- The company has one of the longest dividend streaks at 132 years.
- The company is a Dividend King with 66 years in a row of dividend payments.
- Procter & Gamble’s stock generally does well during volatile markets.
- It has a beta of around 0.40, meaning the stock price does not decrease as much when the broader stock market declines.
Procter & Gamble is another stock with an A+ dividend quality grade and a strong balance sheet. The dividend is growing at an average rate of roughly 6% per year. The current dividend yield is nearly 2.6%, almost double that of the S&P 500 Index.
With high dividend safety and products consumers need in good times and bad, Procter & Gamble is an excellent long-term holding.
- Ticker: PG
- Market Cap: $337.2 billion
- Annual Dividend Rate (FWD) Per Share: $3.65
- Dividend Yield: 2.56%
Hormel (HRL) is a company currently challenged by high inflation. It makes the company’s labor, freight, commodity costs, etc., more expensive. Also, stressed consumers seek lower prices or sometimes buy fewer items than they used to during times of high inflation.
But the company sells something almost everyone buys, branded proteins. It used to sell only meat but has branched out through acquisitions. The most recent purchase was Planter’s, letting Hormel move into snacking. Today, Hormel is known for selling pork products, turkeys, peanut butter, nuts, cold cuts, etc. The leading brands are Hormel, Black Label, Skippy, Jennie-O, Justin’s, SPAM, Planters, Applegate, and more. Many of its brands are No. 1 or No. 2 in their market segment.
Hormel is known for its 100+ year dividend history and Dividend King status. The forward dividend yield of nearly 2.9% is the highest in a decade. Hormel increases the dividend annually from about 6% to 8%. In addition, the dividend safety is excellent, with a payout ratio of approximately 58%, an A+ dividend grade, and a solid balance sheet.
Despite Hormel’s struggles with inflation, the company has performed well over extended periods. Hence, investors with a long-term view may like the stock.
- Ticker: HRL
- Market Cap: $20.96 billion
- Annual Dividend Rate (FWD) Per Share: $1.10
- Dividend Yield: 2.87%
We include a utility stock, Consolidated Edison (ED), to add some diversification. The company is one of the oldest utilities, dating back to the early-1820s. ConEd operates as a regulated utility in New York City and the surrounding suburbs.
It provides electricity, natural gas, and steam to businesses and retail customers. ConEd delivers electric services to around 3.6 million customers, natural gas to about 1.1 million clients, and steam to 1,500+ customers. The utility also operates a renewable energy generation and infrastructure business.
ConEd’s revenue and earnings per share grow slowly because NYC and the surrounding suburbs are densely populated, and the population growth is low. Top and bottom-line growth come from higher demand and rate hikes.
Still, ConEd pays a nice dividend yield of nearly 3.4%. The utility has paid the dividend for 100+ years and has increased them for 49 years. It is one year shy of becoming a Dividend King. The dividend growth rate is low, though, at an average of 2.5% to 3.0% per year.
Most utilities have high payout ratios. But ConEd has a reasonable one of 69%, which provides confidence about the safety when combined with the B+ dividend quality grade. Hence, investors should expect small dividend increases annually.
The stock is probably fairly valued at this point. But the decent yield, safety, and growth make ConEd an attractive stock on this list of best long-term dividend stocks in 2023.
- Ticker: ED
- Market Cap: $33.95 billion
- Annual Dividend Rate (FWD) Per Share: $3.24
- Dividend Yield: 3.39%
The fifth best long-term dividend stock is General Dynamics (GD), the defense contractor. Many people may not know the company but know the military equipment it makes. General Dynamics designs and manufactures the M-1 Abrams tank, Stryker vehicle, Virginia-class and Columbia-class submarines, and other products. The firm also has an extensive aviation business centered around Gulfstream business jets and services at smaller airports. More recently, the defense company expanded into government information technology consulting after acquiring CSRA.
As one of the five largest American defense contractors, the company has dominant market shares and recession-proof characteristics. In fact, General Dynamics is the only supplier of M1 tanks and Stryker vehicles and one of two suppliers of nuclear submarines.
Defense spending tends to grow over time, despite periodic downturns caused by recessions, budget cuts, or administration changes. Moreover, industry consolidation has allowed some defense contractors to increase their profitability.
Although not too well-known, General Dynamics is a Dividend Aristocrat with a 32-year streak of dividend increases. The firm raises the dividend at a decent clip ranging from about 6% to 8% annually. Further, the modest payout ratio of ~41% indicates future increases are likely. The payout ratio, an A+ quality grade, and an improving balance sheet make the stock one to like.
General Dynamics is yielding about 2.4% and is probably near fair value. Still, with the company’s market leadership and limited competitors in the market space, the stock is an excellent long-term dividend stock for investors.
- Ticker: GD
- Market Cap: $59.82 billion
- Annual Dividend Rate (FWD) Per Share: $5.28
- Dividend Yield: 2.42%
Dividend stocks are suitable for many investors to own. Many examples of success in buying and holding dividend stocks exist. For instance, Ronald Read built a dividend stock portfolio worth $8 million on only a janitor’s salary. The combination of frugal living and a high savings rate let him build a fortune only a few can dream of.
More importantly, over time, they can generate a passive income stream. Suppose you start early enough; the dividend income can grow substantially over two or three decades to an annual income worth thousands or tens of thousands of dollars. This income can go a long way to replacing a regular salary when combined with Social Security and retirement plan distributions.
Disclosure: The author owns the stocks discussed in the article.
This article originally appeared on Savoteur.