The 7 Best Dividend Stocks for Passive Income in 2023
Will the Federal Reserve let up on the rate hikes? Traders are left wondering whether Jerome Powell will give them presents or a lump of coal this holiday season. With inflation still running hot and interest rates remaining uncertain, there are a lot of risk factors for investors to consider heading into 2023. However, investing in certain dividend stocks can offer a far lower-stress way of generating income and share price gains.
Now, the first question might be: How safe is a company’s payout given the worsening economic outlook? However, all seven of the names below are Dividend Aristocrats, meaning they have raised their payouts annually for at least 25 consecutive years. That’s a period covering the dot-com bust and the Great Recession. In other words, these companies have proven they can prosper in difficult times and not just maintain, but increase their dividend. So, there’s a good chance they can weather the current turmoil as well.
The names on today’s list of the best dividend stocks for passive income all have a yield of at least 3%. This offers a strong starting point in addition to any future dividend increases.
Best Dividend Stocks for Passive Income: Exxon Mobil (XOM)
Let’s start off the list with the king of energy stocks: Exxon Mobil (NYSE:XOM). Exxon is far from the flashiest or fastest-moving name in energy. However, for dividend stock investors, Exxon’s famed conservativism is just the right recipe.
For decades, Exxon has stuck to its knitting, producing oil, gas, and refined chemical products through all sorts of economic cycles. Management has also developed a strong reputation for putting capital to work during industry downturns when its peers lose their resolve. This has allowed Exxon to earn superior returns on its investments over the years.
A recent example of this was Exxon’s bold investment in offshore oil production in the South American nation of Guyana. Exxon developed the Guyanese oil industry from nothing to where it is today, turning the country’s fortunes around almost single-handedly. That find is also paying off in a big way for Exxon, as it has a huge new production center ready to go just as crude oil has emerged from its decade-long slumber.
Exxon Mobil is a reliable company in an industry otherwise known for disappointments. Management has rewarded shareholders with a dividend increase every single year dating back to the 1980s. Shares currently go for less than eight times forward earnings and offer a 3.5% dividend yield.
IBM (IBM)
After a decade of watching mega-cap technology stocks soar, it might have seemed crazy to think about buying IBM (NYSE:IBM). After all, the staid technology company seemed to have missed most major technological trends and was struggling to maintain even flat revenue while the rest of the tech sector soared. 2022 has put things in a new perspective, though. IBM stock is up more than 8% year-to-date, which is tremendous compared to the rest of the technology sector.
How has IBM managed to deliver in such a dour year for the sector? It’s because the company is fundamentally in a different place than its rivals. IBM already is a huge business that has customer relationships with Fortune 500 companies that span decades. The company maintains and provides consulting to support a great deal of legacy infrastructure and hardware. This stuff isn’t glamorous, but it tends to be mission-essential and can remain valuable far longer than skeptics might guess.
IBM is far from dynamic at this point, but simply keeping the ship steady is enough with shares yielding 4.5%. Meanwhile, don’t discount future growth. The Red Hat acquisition greatly broadened IBM’s push into the hybrid cloud. Indeed, IBM’s cloud computing offering, while trailing the big three, has gained some traction with major customers in recent quarters.
IBM still has more to prove to its shareholders. However, the current focus on profitability and improving efficiency favors IBM as compared to other technology companies that had been more free-spending in prior years.
Best Dividend Stocks for Passive Income: Clorox (CLX)
Clorox (NYSE:CLX) has surprised a lot of investors over the past few years. Consumer staple stocks are known for their consistency. And yet CLX stock became a rather volatile holding. Shares ran up as much as 66% between late 2019 and mid-2020 as people stocked up on cleaning supplies.
But these panic purchases were far more than proved necessary. This led to a slump in Clorox’s product sales as it has taken time for the glut of goods to clear up. Clorox’s profits have fallen significantly, and shares are now trading a little below where they did prior to the start of the pandemic.
That makes for a solid entry point on CLX stock. Ultimately, sales of bleach and its other products will return to normal pre-pandemic levels and Clorox will get its profit margins back to typical levels. And on the supply chain front, we’re already seeing signs of improvement there. Additionally, Clorox has been pushing through price hikes that will raise revenue considerably going forward. All told, long-term investors can buy this defensive holding at an attractive price today.
Realty Income (O)
Realty Income (NYSE:O) has a compelling message for dividend stock investors: It labeled itself “The Monthly Dividend Company.” Realty has paid a monthly dividend since 1994 and is known for raising that payout amount several times each year.
How does Realty Income manage to provide investors with a strong, consistent yield? It is a real estate investment trust (REIT) and one specifically in the triple net lease category. These reduce the risk for the landlord since the tenant is responsible for major expenses including tax, maintenance, and insurance.
Real estate stocks have had a volatile year. After all, the sector is tied to the economic cycle — a recession can hit tenants’ incomes, reducing their ability to pay rent. On top of that, higher interest rates potentially mean higher expenses for real estate operators which often use a great deal of leverage to finance their properties.
Regardless, Realty Income has a strong balance sheet, being one of the few REITs with an “A” credit rating. It has plenty of financial flexibility even if a recession hits. On top of that, its wide range of tenants gives Realty Income additional stability. Shares are off more than 10% year-to-date, pushing O stock’s dividend yield up to almost 5%.
Best Dividend Stocks for Passive Income: 3M (MMM)
Industrial manufacturing powerhouse 3M (NYSE:MMM) is going through a down decade. Shares are down by approximately half from their all-time highs. Adding insult to injury, MMM stock is now selling for the same price that it did way back in 2013.
However, things aren’t nearly as bad as the stock price would indicate. Since 2013, the company has grown annual earnings from $6.72 per share that year to more than $10/share last year. The company has also grown revenues and free cash flow at a modest but positive rate.
Rather, it’s the company’s valuation ratio that has plunged. The P/E ratio is now down to less than 11x, which would have been a previously unthinkable level for 3M. Yes, the company faces various product liability lawsuits along with profit margin pressure with the current economic conditions. On the other hand, 3M is a dominant industrial company set to benefit from the current rush to reestablish more manufacturing and supply chains in North America. In addition to the compelling starting valuation, MMM stock offers an appealing 4.8% dividend yield.
Stanley Black & Decker (SWK)
Power tools maker Stanley Black & Decker (NYSE:SWK) has gotten drilled over the past year. The company enjoyed a pandemic-related boost as people took up home improvement and remodeling projects at an accelerated clip in 2020 and 2021.
However, power tools tend to be pretty durable. Meaning that all those additional sales over the past two years have led to declining demand now. Equipment bought in 2020 probably won’t need to be replaced or upgraded for quite a while yet. Resultingly, Stanley Black & Decker went from generating record earnings per share in 2021 to being on pace for earnings far below pre-pandemic levels heading into 2023.
But in the longer term, this sort of volatility won’t matter. Ultimately, the demand for tools and equipment will level off regardless of near-term spikes and slumps in sales.
Stanley Black & Decker traditionally earned approximately $6.50 per share in annual profits in the years leading up to the pandemic. Assuming no additional growth since then, an 18x P/E ratio on Stanley Black & Decker’s normal level of earnings would lead to a stock price target of $117 against the current share price of $77. On top of that, SWK stock is a Dividend Aristocrat, and the current yield is up to 4.1%.
Best Dividend Stocks for Passive Income: Consolidated Edison (ED)
Consolidated Edison (NYSE:ED) is one of the country’s largest power utilities. It primarily serves the New York City area, along with a portion of New Jersey.
The company has a storied history dating all the way back to 1823. However, it hasn’t gotten stuck in the past. In fact, ConEd is now one of the industry’s pioneers in terms of rolling out renewable energy.
Management is guiding to $72 billion of capital expenditure spending over the next ten years. Much of this will be to aid the state of New York with its plan to end carbon emissions in the state’s electricity sector by 2040. This sort of spending is ideal since the state regulators typically guarantee a return level on this sort of large-scale investment.
ED stock might not seem particularly cheap at 21x forward earnings and a 3.2% dividend yield. However, don’t write off utilities too quickly. In addition to their steady performance and rock-solid yields, there are additional growth prospects today. That’s thanks to electric vehicles, which will provide the biggest new catalyst for electricity demand in ages.
On the date of publication, Ian Bezek held a long position in XOM, IBM, SWK, and MMM stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
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