VIG - The 3 Best Dividend Stocks to Buy for 2023 

2023-05-11 08:00:56 ET

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When looking for the best dividend stocks for 2023, an excellent place to start is with the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG ). It is the largest U.S.-listed dividend ETF with $65.3 billion in net assets.

The ETF tracks the performance of the S&P U.S. Dividend Growers Index , a collection of 315 dividend-paying stocks that have a record of increasing their dividends.

In 2022, the ETF had a total return of -9.81%, about half the loss of the SPDR S&P 500 ETF Trust (NYSEARCA: SPY ). So there’s no question that VIG can deliver a combination of offense and defense. I think dividend stocks, in general, possess this attribute.

When looking for the best dividend stocks to buy, I’m more interested in the dividend growth than the yield. That’s because growth in dividends results from growth in earnings. The two usually go hand in hand. VIG delivers these types of companies.

So, while the best dividend stocks to own don’t necessarily have the highest yields, they’ll make you plenty of money over time.

Microsoft (MSFT)

It’s a good thing I don’t focus on dividend yield because Microsoft’s (NASDAQ: MSFT ) is 0.9%. You won’t be able to pay the rent from its dividend payout, that’s for sure. However, despite the small yield, it still managed to pay $18.1 billion in fiscal 2022 (June year-end), 9.8% higher than a year earlier. This was despite repurchasing nearly $71 billion of its stock over the past three fiscal years.

MSFT stock is the No. 1 holding in VIG, accounting for 4.5% of the fund’s assets. The company has increased its dividend for 13 years straight . Most recently, it upped its quarterly payout by 10% to 68 cents a share.

While many investors have focused on the smackdown Microsoft got from UK regulators over its proposed $69 billion acquisition of video game maker Activision Blizzard (NASDAQ: ATVI ), the real potential for its growth lies with artificial intelligence ( AI ) and cloud computing.

Bernstein analyst Mark Moerdler believes its push into AI could vault it past Amazon (NASDAQ: AMZN ) into the top spot in cloud computing. According to Barron’s :

“AI at Microsoft is far more than Bing Chat,” Moerdler writes. “It is becoming core technology everywhere and in everything that Microsoft does.” The analyst estimates AI software touches products that account for more than 42% of Microsoft’s revenue…

In January, Microsoft announced it was investing $10 billion in OpenAI , the creators of ChatGPT. Since then, the stock is up 30%. What’s not to like?

Costco (COST)

Costco (NASDAQ: COST ) also has what some might consider to be an unimpressive dividend yield of 0.8%. But, again, it’s important to emphasize that dividend growth is more important than yield. On April 19, the membership-only warehouse club announced a 13.3% quarterly dividend increase to $1.02 a share.

COST is the 15th largest holding in VIG, accounting for 1.6% of the fund’s assets. The company has raised its dividend for 19 years in a row . In addition, it sometimes pays a special dividend. For instance, in D ecember 2020, shareholders were treated to a $10-a-share one-time payout .

The argument against buying Costco stock is that it’s expensive. It trades at o.95 times sales and 23.3 times cash flow, higher than its five-year averages. However, the detractors fail to point out that Costco has the finest business model in retail. No one can beat it, except perhaps LVMH (OTCMKTS: LVMUY ), but it’s at an entirely different price point.

Morningstar Canada Senior Editor Andrew Willis recently discussed the pros and cons of investing in Costco . One point stood out to me:

Investors in Costco should take comfort in the power of the brand and structure it has built, having just been through quite a few challenges in the last decade and a half. From a financial crisis to the emergence of digital retail to two meaningful fee increases for Costco members, the company has proven its lasting power with membership renewal rates still around 90%.

As long as Costco retains members, monthly same-store sales figures don’t matter as much. As Willis points out, membership fees account for about 55% of its earnings. So it can afford a bad month or two, having collected $4.2 billion in membership fees in fiscal 2022, 9% higher than in fiscal 2021.

Texas Instruments (TXN)

Texas Instruments (NASDAQ: TXN ) increased its quarterly dividend by 8% with the November payment to $1.24 a share for a healthy 3% yield. This marked the company’s 19th consecutive dividend increase. TXN is the 22nd largest holding in VIG, accounting for 1.2% of the fund’s assets.

As semiconductor companies go, Texas Instruments is not the most glamorous, making analog chips, embedded processors and even electronic calculators. Who could forget the TI-35 ? Of course, its calculator revenue is a tiny piece of its business. In 2022, it accounted for just 2% of T exas Instruments’ $20.03 billion in revenue.

The company focuses on capital allocation. As a result, it reports information each quarter, such as cash generation, free cash flow as a percentage of revenue and cash return to shareholders. In Q1 , its cash flow from operations on a trailing 12-month basis was $7.74 billion , 15% lower than in the same period a year earlier. In addition, its capital expenditures were 28% higher at $3.34 billion, cutting its free cash flow by 32% to $4.4 billion. However, despite the drop in free cash flow, it still accounted for 22.6% of revenue.

As for cash returned to shareholders, dividends accounted for 58% of the $7.49 billion total in the trailing 12 months, with share repurchases accounting for 42%.

On the date of publication, Will Ashworth did not have (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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