Dividend shares are well represented within my portfolio. They provide me with a regular — but not guaranteed — income in the form of dividend payments.
Many of us anticipated 2022 being a positive year for the stock market — I know I did. The FTSE 100 is up a mere 3% over 12 months. But that’s not the full story. In fact, several sectors are struggling, while resources and oil have surged.
As such, many of my top picks for 2023 are trading considerably below their 2021 close.
Near-term tailwinds
Banks are normally cyclical stocks in that they often reflect the health of the economy. When economies go into reverse, banks are left with bad debt.
However, right now, this is a sector with huge tailwinds in the form of higher interest rates. Financial institutions are even earning more interest on the money they leave with the central banks.
Lloyds (LSE:LLOY) is my top pick here. The bank’s net interest margins (NIMs) — the difference between savings and lending rates — are expected to hit 2.9% by the end of the year.
Meanwhile, as of 30 June, Lloyds had £78.3bn held as central bank reserves and £145.9bn of eligible assets. Analysts estimate that each 25 basis point hike in the base rate will add close to £200m in income solely from holdings with the Bank of England.
Because Lloyds doesn’t have an investment arm, it has greater net interest income (NII) sensitivity than other banks.
But I’m also picking Barclays. The banking giant has underperformed this year, partially due to a huge fine for securities sold in error. However, the investment arm prospered amid recent volatility. Income at Barclays bond trading division soared to £1.5bn in Q3, largely due to turmoil caused by the UK government’s mini-budget. Higher interest rates are also a major boost for Barclays.
I’ve recently bought more of both of these stocks.
Discounted stocks
I’m also looking at areas of the market that have suffered over the last year. Direct Line shares are down 21% this year.
However, the firm has responded to inflation and pushed prices up accordingly. It’s also worth noting that when the economy goes into reverse, people will still need insurance. I added Direct Line to my portfolio last month. The stock offers a handsome 10% dividend yield.
Legal & General is another dividend giant I’m buying more of. It has a healthy dividend coverage and business is strong. L&G recently reiterated its full-year guidance with operating profit growth in line with the 8% it delivered in the first half, and capital generation of £1.8bn. The firm is also a net beneficiary of rising interest rates.
High potential
My final pick is Chilean mining giant Sociedad Química y Minera de Chile SA. The firm surged this year as lithium prices soared. But the expected collapse in related prices hasn’t occurred. In fact, prices of the metal, which is key to the electrification agenda, have remained steady. I’m looking to add this USD-denominated stock to my portfolio next year.
However, I’m very aware that a deeper-than-forecast recession won’t be good for my top picks, especially financial stocks. Bad debt provisions will increase and demand for financial services will fall. SQM is no different. The lithium price is partially reliant on continued demand from China.
