Dividend stocks: how I’m aiming for double-digit returns in 2023!

Dr James Fox explains how he’s targeting double-digit returns over the next year by investing in dividend stocks with upside potential.

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Dividend stocks are well represented in my portfolio.

My portfolio performed fairly well over the past year considering the environment. But going forward, I want to achieve double-digit growth over the next 12 months.

For me, dividend stocks are core to this. If I pick wisely, I can be fairly sure that I will receive at least a dividend. If I’m very wise, I can hope to see some upward movement in the share prices too.

So, let’s take a close look at my top picks.

A safe yield

In 2021, Lloyds (LSE:LLOY) had a dividend coverage ratio of 3.8. This was substantial, and meant that the bank could afford to pay shareholders the stated dividends nearly four times.

Going into 2023, Lloyds will likely continue to benefit from higher interest rates. The bank said the net interest margin (NIM) — essentially the difference between lending and saving rates — was forecast to reach 2.9% by the end of 2022, and it could grow further in 2023.

Lloyds is even earning more interest on its deposits with the Bank of England. Analysts suggest that every 25 basis point hike is worth £200m in interest revenue. To date, this could represent a £2.5bn tailwind in central bank-derived income alone.

I’d also expect to see the share price to push upwards over the next year as the economic environment improves. But in the near term, one risk is that impairment charges could rise due to a possible recession.

I’ve owned Lloyds shares for some time, but have recently bought more. It currently offers a 4.4% yield, and that’s great.

But I also think we could see at least a 5% increase in the share price over the next year. One reason for this is that a discounted cash flow model with a 10-year exit suggests the stock is undervalued.

This is calculated by forecasting cash flow over 10 years, and subtracting a discount rate — reflective of the time value of money. The calculation suggests it’s undervalued by as much as 60%.

A surging resource stock

Sociedad Química y Minera de Chile (NYSE:SQM) has a sizeable 8% dividend yield and coverage is around 2.2 — anything above two is considered healthy.

The Chile-based speciality chemicals company focuses on the mining and production of iodine, lithium and other industrial chemicals.

The stock has soared over the past 18 months as lithium prices increased 10-fold. But there’s no reason to assume it won’t continue its bull run.

While the global economy might be slowing down, demand for battery dependent products, particularly electric vehicles (EVs), has remained strong. That’s because demand for lithium is tied to one of the most important economic trends of our generation.

I expect increased competition for resources over the next decade that will translate to higher prices for fuels and metals.

I don’t often buy stocks denominated in US dollars due to currency fluctuations. That’s because an appreciating pound could wipe out some of my gains, which is a clear risk.

But I’m bullish on this miner. I see lithium as a powerful investing theme and I wanted the well-covered 8% yield. That’s why I recently added it to my portfolio.

With an 8% yield and a bit of share price growth, I could achieve my double-digit objective.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Lloyds Banking Group Plc and Sociedad Quimica y Minera de Chile S.A.. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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