While my investment portfolio mainly consists of growth shares these days, I also own quite a few dividend stocks. Unilever, Diageo, and Reckitt – which are all listed on the London Stock Exchange – are some examples of dividend payers I own.
In 2023, I plan to buy more dividend shares for my portfolio. Here’s why.
Valuable in choppy markets
One reason I want to boost my exposure to these shares in 2023 is that I expect the stock market to be choppy in the near term. With inflation still very high and interest rates rising, I’m not expecting huge capital gains from the market as a whole next year.
Now in a choppy market, dividend stocks come into their own. That’s because the income they provide is an alternative source of return. With these stocks, I can sit back and relax knowing that, even if the market goes nowhere, I’m still generating returns from dividends.
The right conditions for dividend stocks
Another reason I want to increase my exposure here is that I think economic conditions are likely to favour these stocks in the near term.
When inflation is high, like it is now, near-term returns are more valuable than future returns. So I reckon stocks that pay dividends (these are near-term returns) are set to be popular with investors in 2023.
Similarly, when interest rates are rising, like they are now, the stocks of companies with cash flows that are near-term weighted tend to hold up better than those of growth companies with cash flows in the future. This is due to the way equity analysts value stocks. Generally speaking, dividend stocks tend to have near-term cash flows. So I reckon they’re a good bet for 2023.
Protection for my portfolio
Finally, I think dividend stocks could play a valuable role for me in 2023, from a portfolio protection perspective.
Companies that pay dividends tend to be well-established, profitable businesses. And often the share prices of these kinds of companies tend to fall less than the broader market during periods of stock market turbulence.
Unilever is a good example here. While the MSCI World index has fallen by double-digits this year, Unilever shares have actually risen.
So I think these stocks could help protect me against stock market volatility and also help balance out my portfolio, which is skewed towards growth stocks.
I’ll be selective in 2023
Now, I’ll point out that not all dividend stocks are created equal. There are some that have great long-term records when it comes to distributions, and generating shareholder wealth in general. At the same time, there are others with patchy income track records that have produced disappointing long-term returns for investors.
So I’m going to be very selective when buying dividend stocks for my portfolio in 2023. I’ll be looking for high-quality companies that have a good chance of delivering solid long-term returns.
