Investors should brace up for another challenging year for equities. Turbulence in the banking system, inflation and a potential recession are the major headwinds. I would not completely shy away from growth or penny stocks. However, through 2023, it makes sense to remain overweight on high-yield dividend stocks.
In general, the high-yield dividend stocks have a low-beta and they represent companies with strong fundamentals. Amidst the market turmoil, there are several dividend stocks that trade at a significant valuation gap. It’s a good time to accumulate these stocks for returns that comfortably beat inflation.
I believe that market sentiments might reverse if the fed pursues expansionary policies in the second half of the year. In this scenario, undervalued blue-chip stocks with an attractive dividend yield can have a meaningful rally.
This column discusses seven high-yield dividend stocks that could double your money in 2023.
Newmont Corporation (NEM)
Newmont Corporation (NYSE:NEM) stock looks attractive at a forward price-earnings ratio of 20.6. NEM stock offers a dividend yield of 3.57%, and I expect dividend growth if gold continues to trend higher.
A big reason to like Newmont is an investment grade balance sheet. With a liquidity buffer of $6.7 billion and robust free cash flows, there is ample headroom for value creation. For every $100 increase in gold price, Newmont expects $400 million in incremental cash flows.
It’s also worth noting that Newmont has guided for sustained improvement in all-in-sustaining-cost. In 2025 and beyond, the company expects the AISC to be between $1,000 to $1,100 an ounce. Even if gold trades at $2,000 an ounce, EBITDA margin is likely to be robust.
Barrick Gold (GOLD)
Barrick Gold (NYSE:GOLD) stock looks attractive at a forward price-earnings ratio of 22.5 and offers a dividend yield of 2.3%.
In the last six months, GOLD stock has trended higher by 15%. However, the best part of the rally is still to come if gold sustains above $1,900 an ounce.
For 2022, Barrick Gold reported $3.5 billion in operating cash flows. Considering the uptrend in gold, OCF is likely to be over $4 billion for the year.
Further, Barrick ended 2022 with cash and equivalents of $4.4 billion. The company therefore has high financial flexibility for dividend growth and aggressive share repurchase.
A strong balance sheet has also allowed Barrick to invest in exploration programs. On a year-on-year basis, the company’s proven and probable gold reserves increased by 10%. With a strong reserve base and healthy replacement ratio, Barrick has clear cash flow visibility.
Pfizer (NYSE:PFE) stock looks deeply undervalued at a forward price-earnings ratio of 11.8. After a correction of 23% in the last 12 months, the 4.0% dividend yield stock looks poised for a reversal rally.
An important point to note is that the COVID-19 vaccine sale translates into a significant bump-up in free cash flows for Pfizer. The company has been using the cash buffer in two important ways.
First, the company is investing heavily in research and development to speed up the existing product pipeline. As more drugs are commercialized, revenue growth is likely to remain healthy.
Further, Pfizer has been active on the acquisition front. Recently, the company announced a $43 billion definitive agreement to acquire Seagen (NASDAQ:SGEN). Acquisitions in the last few quarters has helped the company in broadening its product portfolio.
With these positives, the outlook for Pfizer is bullish. I also expect steady dividend growth as a deep product pipeline translates into an increase in free cash flows.
Albemarle Corporation (ALB)
Albemarle Corporation (NYSE:ALB) stock does not have a very attractive dividend yield. However, I would still add the name to the list of high-yield dividend stocks for two reasons.
First, the company’s growth guidance points to healthy upside in dividends in the coming years, ALB stock trades at a forward price-earnings ratio of 7.2. Total returns in the stock will be significant considering the valuation gap.
As an overview, Albemarle is one of the best stocks to consider exposure to lithium. The company closed 2022 with a lithium conversion capacity of 200ktpa. Albemarle has guided for an increase in conversion capacity to 550ktpa (mid-range) by 2027. Capacity growth is likely to continue even beyond this period.
Therefore, Albemarle is poised for healthy revenue growth and cash flow upside through the decade. It’s worth mentioning here that the company reported operating cash flow of $1.9 billion for 2022. In the current year, the OCF guidance is at $2.25 billion. Clearly, the business is a cash flow machine and ALB stock will trend higher on robust revenue growth coupled with dividend upside.
Since the de-merger of the media division, AT&T (NYSE:T) stock has remained subdued. However, a big breakout on the upside seems imminent considering the valuation.
T stock trades at a forward price-earnings ratio of 7.5 and offers an attractive dividend yield of 6.0%.
I believe that there are two major catalysts for T stock trending higher in 2023. First, the deleveraging story is likely to continue. Last year, the company reduced net debt by $24 billion. AT&T is considering the sale of its cybersecurity business for further deleveraging.
AT&T has reported healthy growth in key business metrics. Last year, wireless and fiber subscriber growth was encouraging. With the company having made significant investments towards boosting its 5G network, business metrics are likely to remain healthy.
AT&T has also guided for free cash flow in excess of $16 billion for 2023. This will ensure that dividends sustain and credit metrics improve.
Vale (NYSE:VALE) is an interesting pick among high-yield dividend stocks because there is a possibility of a recession in 2023.
However, I believe that with the financial sector crisis and the likelihood of recession, policymakers will shift to expansionary policies in the second half of 2023.
This will be positive for industrial commodities. A potential stimulus from China would be an additional catalyst. It therefore makes sense to consider exposure to VALE stock at current levels.
VALE stock trades at a forward price-earnings ratio of 5.4 and offers a dividend yield of 7.1%. Clearly, the stock is deeply undervalued and I would bet on a strong upside.
The realized price for iron ore fines was lower in 2022 as compared to 2021. Vale still managed to report free cash flow of $5.7 billion. With a strong balance sheet and healthy cash flows, the stock deserves a better valuation.
Rio Tinto (RIO)
Another commodity stock I am bullish on is Rio Tinto (NYSE:RIO). RIO stock has remained sideways in the last 12 months and trades at a forward price-earnings ratio of 8.7. Further, the stock offers an attractive dividend yield of 7.5%.
Assuming a scenario that there is a commodity bull market in the second half of 2023, RIO stock is poised for a big rally.
A key reason to choose Rio is strong fundamentals. For 2022, Rio reported free cash flow of $9 billion, with the iron ore segment being the key cash flow driver. However, Rio has been diversifying with exposure to copper, aluminum, and lithium. As the push for green energy continues, these metals will witness incremental demand.
Coming back to the balance sheet, Rio reported net-debt-to-EBITDA of 0.16 for 2022. With strong financial flexibility, Rio Tinto has guided for capital expenditure of $27 billion from 2023 to 2025. This will translate into free cash flow upside and dividend growth.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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