My Top 2023 Dividend Yield Monsters SQM.....

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Steven Cress

Head of Quantitative Strategies at Seeking Alpha. Data analysis and interpretation have taken center stage... more

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My Top 2023 Dividend Yield Monsters

Feb. 13, 2023 7:00 AM ETBroadstone Net Lease, Inc. (BNL), PRU, SQM43 Comments58 Likes

Summary

• To hedge against inflation uncertainty, consider three high-yielding dividend stocks to battle ongoing inflationary pressures and portfolio losses by a hawkish Fed.
• The word on disinflation is creating froth in the market despite Chairman Powell's insistence that “these are the very early stages of disinflation. It has a long way to go.”.
• Don’t fight the Fed. Although the economy is experiencing some cooling and better-than-expected jobs reports and results, red-hot inflation, and recession fears are everpresent.
• My picks have yields ranging from 4.86% to 9.72%, and they were picked using our Dividend Scorecard and grades which can quickly validate stocks with solid dividends and flag stocks with at-risk dividends.
• The yields on these picks are substantial. Each stock offers capital appreciation and is collectively strong on value, growth, profitability, earnings revisions, and momentum attributes.

Torsten Asmus

Why Dividend Investing Matters

When interest rates hit record lows in 2020, who would have thought inflation would reach 40-year highs shortly thereafter? Investors rotated from bear markets to bull markets growth stocks to value stocks. Powell's recent "disinflationary" remarks were seen as positive, and the market sentiment received an uptick. But the Fed has made crystal clear it plans to raise rates and keep them higher for longer. So don't fight the Fed!

The dividend yield monster stocks for this article were selected on a combination of key criteria:

1. Capital Appreciation Potential

2. Dividend Yield

3. Dividend Safety

4. Dividend Growth

5. Collectively strong on the attributes of value, growth, profitability, earnings revisions, and momentum

Some investors believe that the Fed may appear more dovish as inflation and costs decline, but the Fed works to tame inflation. Investors may best be served by considering higher-quality companies that offer solid dividend yields as a hedge in this macro environment. The best route for acquiring stocks with the safest dividends is to use the Top Quant Dividend Stocks screen. With that thought in mind, this particular article aims to reach a little outside of the parameters of the safest dividend stocks and obtain stocks that offer a combination of capital appreciation potential, high dividend yields, dividend growth, dividend safety, and solid overall fundamentals.

Perhaps not the highest-ranked, these stocks still have good Dividend Safety grades. The intent of this article is to shoot for both high yield and safety - two investment characteristics that often contradict each other. Dividend investing matters for a number of reasons.

• Investment Alternative - Income-oriented investors may want to invest in something other than high-growth securities and are willing to consider dividend-paying stocks that take on equity market risk.

• Power of Compounding - Reinvesting dividends can increase the value of one's portfolio significantly, boosting growth and returns over time.

• Inflation Hedge - Dividend-paying stocks can offer a combination of regular income and a cushion when the markets are volatile.

• Less Volatile - Dividend-paying companies tend to be more profitable, hence their ability to pay a dividend, as they possess enough excess free cash flow to overcome challenging times.

• Tax Advantages - Some qualified dividend-paying stocks are taxed at lower rates than ordinary income.

Because inflation has resulted in investors budgeting for every dollar, building a portfolio that generates income offers an opportunity to hedge against potential downturns. Because not all dividend stocks are created equal, I have selected three dividend stocks in varied sectors whose overall Quant Ratings & Factor Grades complement their high yields.

3 Dividend Stocks with High Yields to Invest In

Better-than-expected economic data has signaled to some investors that there may be less recession risk and a smoother ride in 2023 than anticipated. CPI has trended lower, and solid jobs reports have the markets excited. But Fed Chair Powell's mention of disinflation does not mean that investors are in the clear. Powell specifically cautioned that "these are the very early stages of disinflation. It has a long way to go." Whether you believe he's dovish or hawkish may or may not make a difference. What's clear is that the Fed plans to continue to temper costs. Whether in an up or down economy, the right high-yielding dividend stocks can help be the monsters needed to bite back against inflation eating at your portfolio.

1. Sociedad Química y Minera de Chile S.A. (NYSE:SQM)

• Market Capitalization: $26.24B

• Dividend Safety Grade: C+

• Forward Dividend Yield: 9.72%

• Quant Rating: Strong Buy

Sociedad Quimica y Minera de Chile (SQM) is a specialty chemical producer focused on fertilizers and agricultural chemicals in the production and distribution of plant nutrients and their derivatives. Headquartered in Santiago, Chile, one of SQM's most vital minerals and specialties is lithium. As a Top Material Stock, SQM's lithium is used in producing organic chemicals used in medical, agricultural, and industrial applications, including the production of synthetic rubber. SQM offers biocides, electrochemical materials for batteries, air conditioning chemicals, and lithium derivatives.

Benefitting from the rise in commodity prices and a solid outlook for lithium as the U.S. climate bill is offering more than $13B investment into electric vehicle batteries and raw material production, SQM could stand to gain. Written in a Seeking Alpha News report:

"Goldman Sachs recently forecast continued high prices for lithium in the near term, boosted by restocking demand from iron-based electric vehicle battery expansion and higher than expected EV sales in China."

Investing in green energy and some of the leading solar and industrial power sources, SQM has diversified its product offerings and is benefitting from the trend in going green and the demand for electric vehicles, evidenced in the latest earnings report.

SQM Growth & Profitability

Global lithium demand surged nearly 55% from 2020 to 2021 on rising demand for electric vehicles, pushing lithium prices amid China's EV boom to new highs.

EV Record-Making Gains (BloombergNEF, MarkLines, Asian Metal Inc.)

In the first three quarters of 2022, lithium accounted for 77% of SQM's gross profits and tremendous earnings. Soaring costs for lithium extraction in 2021 (+17% Y/Y) moved into 2022, and producers are passing costs onto consumers, hiking prices. As lithium is used in hot commodities like smartphones, tablets, EVs, and other devices, increasing prices is an easy sell for consumers needing lithium, a new gold.

SQM Stock Profitability Grade (SA Premium)

Significant demand for production resulted in Q3 EPS of $3.85, beating by $0.53, and revenue of $2.96B beating by 347.14% year-over-year. Historically high growth levels have given way to SQM investing heavily in R&D and expansion, with plans to open a plant in China to draw on the blossoming EV market. SQM Chief Executive Officer Ricardo Ramos announced:

"We look forward to keeping this momentum going in the future, formalized through our Salar Futuro announcement. This momentum has driven us to continue investing and growing our lithium production around the world. We recently announced the purchase of a plant in China, which has been overhauled to allow us to process lithium sulfate from our operations in Chile to lithium hydroxide. Yesterday, we announced that we will begin the expansion of our lithium hydroxide capacity in Chile from 40,000 metric tons to 100,000 metric tons in Chile."

Given SQM's excellent balance sheet and cash from operations over $3B, profits are strong and give way to tremendous dividend yield and growth. Although the company's dividend consistency is an 'F,' one must keep in mind that this foreign stock is an ADR that comes with greater volatility and is subject - in this case - to the volatile Chilean geopolitical environment. At one point last year, Chile's government attempted to nationalize parts of its mining sector, which was eventually rejected.

SQM Dividend Scorecard

SQM Dividend Scorecard (SA Premium)

SQM's dividend scorecard showcases its bustling 9.72% dividend yield, tremendous dividend growth supported by strong revenue, and forward EBITDA Growth of 114.88%. Notably, the Dividend Consistency grade is an F. SQM is an ADR, and the payment cycle for the dividend, like many ADR stocks, is erratic during the quarterly or special distributions. However, the aggregate shows good dividend growth, and the company has the cash to maintain the dividend. The 3-Year Dividend Growth CAGR is 90%. As Seeking Alpha contributor, Joseph L. Shaefer states in his article, "SQM pays a fine dividend - but …it's not a "consistent" dividend. SQM trades on the NYSE and has a long history of being good to shareholders by sharing the wealth during the good times."

In addition to being one of the top three global lithium producers, SQM is also the world's largest producer of iodine, used in pharmaceuticals. Having one of the lowest-cost lithium deposits in the world, at current price highs substantially above the marginal cost of production, SQM is not only one of my strong buy picks, but Scotiabank is also bullish, naming SQM as one of its top picks. With more than half of the global supply of iodine coming from rich Chilean deposits, SQM has a considerable advantage over competitors and a narrow economic moat, which is why its discounted price makes it even more attractive.

SQM Valuation

SQM has maintained a strong valuation, trading at $91.74 per share. Despite the 2022 market volatility, SQM's price performance has been solid, outperforming its sector peers over the past nine- and twelve months, trading at +56% over the last year.

SQM Stock Valuation Grade (SA Premium)

Year-to-date, the stock is up nearly 20%. Showcasing a forward P/E ratio of 6.71x versus the sector median of 14.61x and a forward PEG of 0.46x, a -73.44% difference to the sector, SQM comes at a tremendous discount.

Where commodities fared well in 2022 as the top-performing sector (XLE +52%) to end the year, the need for lithium, a rich specialty material, keeps growing, making this stock ripe for the picking and an excellent option to fight inflation, along with my next two picks.

2. Broadstone Net Lease, Inc. (NYSE:BNL)

• Market Capitalization: $3.22B

• Dividend Safety Grade: B

• Forward Dividend Yield: 6.27%

• Quant Rating: Strong Buy

Broadstone Net Lease, Inc. (BNL) is a diversified REIT that boasts its ability to offer a proven strategy for diversified and defensive growth. Focused on acquiring single-tenant and commercial properties throughout the U.S., its investment strategy focuses on fundamental credit analysis and real estate underwriting. With bullish momentum, not only does BNL maintain substantial cash flow, it is deeply undervalued.

BNL Stock Valuation

BNL comes at a compelling forward P/AFFO of 12.57x, a -21% difference from its peers, and 41.62% Total Debt/Capital. With little debt and a highly concentrated industrial property portfolio, there's little overhead when renting out warehouses, helping keep costs low.

BNL Has A Strong Valuation Framework

BNL Stock Valuation Grade (SA Premium)

Low costs bode well for BNL's profitability, as it has had significant organic growth, highlighted by its solid dividend grades, highlighted by a 'B' Dividend Safety rating, tremendous dividend growth, and a 6.27% forward dividend yield.

BNL Dividend Scorecard

BNL Dividend Scorecard (SA Premium)

Retail REITs posted some of the highest dividend hikes last year, which included BNL's increase of 1.9%. Despite a Q3 FFO of $0.15 that missed by $0.01, the revenue of $103.52 beat by $1.82. Generating consistent results with same-store growth, BNL has maintained a solid balance sheet that includes 790 highly diversified property types that generated $372 million in annualized base rents. With a 99.3% occupancy rate, it's no wonder Broadstone Net Lease has such a strong dividend payout. With a strong executive team that includes current COO John Moragne at the helm to succeed Chris Czarnecki as CEO, this quant-rated Strong Buy is one to consider for portfolios.

3. Prudential Financial, Inc. (NYSE:PRU)

• Market Capitalization: $37.69B

• Dividend Safety Grade: B+

• Forward Dividend Yield: 4.86%

• Quant Rating: Strong Buy

For more than 145 years, Prudential, a well-known financial firm focused on life and health insurance, is my final pick. Boasting a forward dividend yield of 4.86% after recent earnings announcements, Prudential Financial raised its dividend by 4.2% to $1.25, a move that is sure to make shareholders happy. Although the company's Q4 earnings fell short of expectations, citing a difficult macroenvironment, Prudential Chairman and CEO Charles Lowrey stated,

"Our fourth quarter operating results reflect lower variable investment and fee income, partially offset by improved COVID-19 mortality, a benefit from net spread results due to rising interest rates, and underlying business growth," said Chairman and CEO Charles Lowrey."

In addition to exceeding its target of $750M in cost savings, one year ahead of its target, Prudential has strong growth and profitability to substantiate its long history of dividend payments.

Prudential Growth and Profitability

Prudential's business model focuses on long-term investing and growth. Although its Q4 EPS of $2.42 missed by $0.09 and revenues missed by a vast 100% year-over-year, the company managed to return more than $800M to its shareholders compared to the $7.6M since the start of 2021.

Prudential Financial Dividend Grades (SA Premium)

Despite the earnings miss, ten analysts revised their estimates up over the last 90 days, resulting in a B+ revisions grade. Prudential is granting a 4.2% increase in its dividend and up to a $1B share repurchase for 2023. Prudential Financial is on solid footing. With the most attractive-looking dividend grades of my three picks, the company's 4.86% forward dividend yield, B+ dividend safety, and 19 years of consecutive dividend payment is very appealing.

Prudential's 10-Year Dividend Growth Track Record

Prudential's 10-Year Dividend Growth Track Record (SA Premium)

Prudential's ability to generate cash despite extreme 2022 fluctuations in the bond and equity markets and continued declines in long-dated par rates may have caused some headwinds for the firm resulting in the misses. Still, the company has $1.377 trillion AUM and a hefty cash hoard that includes more than $9B cash from operations, allowing Prudential to possess an overall 'A' profitability grade. In addition to strong growth and profitability metrics, Prudential comes at a discount.

Prudential Stock Valuation

Although its share price over the last 52 weeks is down 15.12%, the last six months have shown greater stability, with the shares up 1.36%. Prudential's rock-solid dividend and discounted valuation showcase a stock with potential upside. A forward P/E ratio of 8.77x, which is a -15.08 difference to the sector, forward EV/Sales nearly 50% below the sector, and a forward PEG ratio of -41.05% make evident this stock is undervalued. Consider this income-generating cash cow, along with SQM and BNL. Each is a dividend-yielding monster to consider in 2023.

Conclusion

Whether or not we're in an economic environment experiencing disinflation remains to be seen. Being preemptive with stocks like SQM, BLN, and PRU, each is collectively strong on fundamentals like valuation, growth, profitability, and revisions, offering benefits during periods of high inflation. Additionally, when seeking investments that offer a steady income stream, each of my picks possesses a strong forward dividend yield, outstanding overall dividend scores, and a significant excess cash flow.

Each of these picks is from a different sector, which is a great way to diversify a portfolio. With average four-year yields near or over 4%, investors should be able to thrive in a rising or falling environment without sacrificing quality or growth during market swings. Not only do my picks offer solid value, their strong profitability, and significant cash help ensure shareholders that these stocks' dividend payout should remain consistent. If you prefer alternate dividend stocks with higher Dividend Safety or strong Dividend Growth grades, or perhaps would like to customize your picks into the desired sectors you like, consider using Seeking Alpha's 'Ratings Screener' tool.

This article was written by

Steven Cress

22.78K Followers

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Head of Quantitative Strategies at Seeking Alpha. Data analysis and interpretation have taken center stage in my career. For my purpose, the interpretation of data is the process of mak