The stock market has been on a furious rally to start 2023, but the future still is shrouded with doubt, with a growing number of analysts expecting a recession sometime this year.

And the strong start for equities this year has made some stocks overvalued, or overbought, and is causing some investors to hold back, before buying into the markets. Indeed, one should look for safer and what we like to call “defensive” stocks that can still grow even in trying times.

“Safe,” you say? Then consider investing in high-dividend yield companies!

Strong dividend yield companies don’t sound sexy, but they are a key component for achieving long-term success in your investment portfolio, as they can significantly contribute to the growth of dividends received from the companies in which you are invested.

Building a diversified investment portfolio that balances both attractive dividend yield and sustainable dividend growth, can help you stay invested in the markets, even when the stock market is on a rollercoaster ride.

And just like a well-balanced diet, it can also provide you with a bountiful amount of extra income, especially when you’re in it for the long haul.

For this week, I have compiled a list of companies with solid dividend payouts and stocks that can weather any storm that may come your way.

Johnson & Johnson (NYSE: JNJ)

Johnson & Johnson, a household name in healthcare, medical devices, and consumer health is a valuable addition to any dividend growth portfolio.

The company’s strong financials, management’s track record of successful acquisitions, and diversified operations are some of the reasons why JNJ is a great investment choice.

In April 2022, the company announced a 6.6% increase in its quarterly dividend, bringing it to $1.13 per share, with an annual dividend of $4.52 per share. This brings JNJ’s dividend yield to 2.54%, which is higher than the industry average of 1.56%.

The company’s dividend payout ratio, based on the trailing twelve months’ adjusted earnings per share, is 44.8%. JNJ’s cash flows are strong enough to support this payout, while still investing in growth opportunities.

Johnson & Johnson is in the process of separating its Consumer Health division, which includes well-known brands such as Listerine, Band-Aid, and Neutrogena, into a new publicly traded company called Kenvue.

The spin-off is expected to be completed by the end of 2023, allowing JNJ to focus on high-growth opportunities in its Pharmaceutical and MedTech divisions.

The company is optimistic about increasing its revenue through organic growth and strategic acquisitions in the pharmaceuticals and medical devices industries.

As of October 18, 2022, JNJ’s pharmaceuticals pipeline included 107 programs across various therapeutic areas, including cardiovascular, immunology, neuroscience, and oncology. JNJ projects its Pharmaceutical business to generate $60 billion in sales by 2025.

Last month, JNJ announced its intention to acquire heart pump manufacturer Abiomed (ABMD) for $16.6 billion. The deal is expected to close by March 2023 and be accretive to its earnings in 2024. The acquisition of Abiomed is in line with the company’s strategy to expand its MedTech business into high-growth markets and accelerate its revenue growth.

A true “dividend king,” JNJ is a must-have addition to any dividend investor’s portfolio.

Verizon Communications Inc. (NYSE: VZ)

Verizon Communications is a high-yield stock from the Dow Jones Industrial Average, that is worth considering for investment as we start the new year.

The telecom company has a high yield of 6.3%, and a sustainable payout ratio of over 50%, and should have no issue maintaining its inflation-fighting dividend.

As a telecommunication stock, VZ’s predictability is arguably the best thing about them. Wireless services and cell phones have become essential necessities in this day and age.

Even recessions and economic slowdowns have not resulted in high retail turnover rates. Meaning, Verizon generates consistent cash flow year after year, a reliability that Wall Street really likes.

Verizon’s greatest growth opportunity will come from 5G, until at least the midpoint of the decade. Verizon and its competitors have spent billions of dollars modernizing their cellular infrastructure in order to handle 5G download speeds. 

This investment is expected to result in a continuous device upgrade cycle, significantly increasing data usage. Data delivers the highest margins for Verizon’s wireless sector. Not unexpectedly, the company’s wireless revenue increased by 10% during the September quarter.

While telecom stocks typically have lower earnings multiples due to their slower growth rates, they tend to be relatively stable investments due to their predictable cash flow and profits. And with a relatively low P/E ratio of 8, this makes Verizon a safe and fantastic option in volatile market conditions such as now.

Target Corporation (NYSE: TGT)

Target has had a difficult year, with its stock down roughly 30% in one year. But the retail giant has been paying out and growing its dividend for 51 straight years, and I doubt they will want to break that streak any time soon.

Target’s business is significantly influenced by consumer strength, which has recently begun to deteriorate.

Target CEO Brian Cornell stated in the company’s third-quarter results report that “sales and profit trends weakened considerably at the end of the quarter, with guests’ buying behavior increasingly influenced by inflation, rising interest rates, and economic uncertainty.”

Remarkably, despite these challenges, TGT increased its payout by 20% this year, giving it a 2.7% annual dividend yield. That’s what you call a solid Dividend Aristocrat!

When the economy hit the breaks, Target was left with too much inventory on its shelves, as shoppers moved their purchasing behavior away from non-essential items, slowing down the company’s revenues.

Target’s cash position has also declined from over $5.9 billion at the start of the year to less than $1 billion at the conclusion of the third quarter, which isn’t exactly encouraging.

However, Target has now reshuffled inventory, while difficult in the short term, should pay off in the long run. And given the management’s track record, the 20% increase is likely an indication that Target can preserve its status as a Dividend Aristocrat, so while the next several quarters may be difficult, I expect dividends to remain strong and even rise in the long run.

Given Target’s history of consistent dividend growth for 50 years, and with shares currently being offered at a discounted price compared to their historical highs, It’s a stock that should be definitely included in your shopping list.

They’re safe, but they’re NOT that safe

True, investing in dividend stocks can be an attractive, and safe option for investors looking for a steady stream of income from their investments. However, there are several potential risks and dangers that investors should be aware of before investing in dividend stocks.

Though relatively safe compared to growth stocks, dividend stocks are also subject to the same market risks, such as economic downturns and market crashes. They may be resistant to these market shocks, but they are not immune.

Another risk is the possibility of dividend cuts. Companies may cut or eliminate their dividends when faced with financial difficulties, especially now in the current economic climate.

One thing to also watch out for is the dividend yield trap. Some companies have high dividend yields, but those dividends may not be sustainable, and the stock price may fall once investors realize this.

It is important to remember that investing in a stock solely for its dividend payments is not a wise decision. Instead, investing in companies you believe in and have confidence in their business model, is better.

It does not make sense to invest in a company that you believe is not doing well, simply because it offers a high dividend yield.

Pick companies you are passionate about, in the same way, you pick your favorite ice cream flavor. Just make sure to hold on tight!

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