Our Top 3 Dividend Growth Stock Picks for 2023

As the markets head into 2023, it’s time for a relook at the portfolio and for charting a strategy for the new year. My sense is that blue-chip stocks will continue to remain hot favorites. At the same time, selective growth stocks are likely to surge from undervalued levels. Among blue-chip stocks, it’s a good idea to consider undervalued dividend growth stock picks for 2023.

Trading at an attractive valuation will imply the potential for capital gains. Furthermore, dividend growth can translate into stock re-rating. Dividend and capital gains will also ensure that total returns are positive after adjusting for inflation.

The key consideration in screening dividend growth stock picks for 2023 is the balance sheet and operating cash flows. The three companies discussed have an investment-grade balance sheet. Additionally, there is visibility for free cash flow upside in 2023. Even if cash flows are stable as compared to 2022, dividend growth is likely considering the overall financial flexibility.

Let’s discuss the reasons that make these dividend growth stocks attractive.

Albemarle Corporation (ALB)

Albemarle Corporation (NYSE:ALB) is among the top dividend growth stock picks for 2023. ALB stock currently offers an annualized dividend of $1.58, which implies a dividend yield of 0.6%. However, considering the company’s growth trajectory, it’s likely that dividends will swell in the coming years.

One reason to be bullish on Albemarle is the company’s presence in the lithium business. As demand surges, there will likely be an acute shortage of lithium in the coming years. Albemarle is positioned to benefit with 60% of sales from the lithium segment.

For 2022, Albemarle expects adjusted EBITDA growth in the range of 280% to 300% on a year-on-year basis. Further, the company reported a lithium conversion capacity of 85ktpa in 2021. By the end of the year, the company expects to boost capacity to 200ktpa. This will translate into healthy growth in 2023. Albemarle’s long-term plan includes ramping lithium conversion capacity from 450ktpa to 500ktpa by 2030.

Chevron Corporation (CVX)

With Chevron’s (NYSE:CVX) stock correcting from highs, it’s an excellent time to accumulate this dividend growth stock. CVX stock currently has an annualized dividend of $5.68 and a dividend yield of 3.22%.

One reason to be bullish on Chevron is its strong cash flow visibility. For Q3 2022, Chevron reported $13.7 billion in operating cash flow. This would imply an annualized cash flow potential of over $40 billion. However, even if we consider a relatively conservative scenario, Chevron is well-positioned to increase dividends and pursue share repurchases.

At the same time, Chevron has ample financial flexibility to meet the guidance of $15 to $17 billion in annual investments. This will ensure a robust reserve replacement and investment in the company’s low-carbon business. A net-debt ratio of 4.9% also provides flexibility for any potential inorganic growth.

While a potential recession in 2023 is a risk for the oil price. Factors such as geopolitical tensions and production cuts will ensure no meaningful correction. Notably, Chevron has low break-even assets to deliver strong cash flows even in a relatively low oil price environment.

Apple (AAPL)

Apple’s (NASDAQ:AAPL) stock has remained sideways to lower in the last 12 months. AAPL stock looks attractive at a forward price-earnings ratio of 22.9. Considering the cash flow potential, it’s also among the best dividend growth stock picks for 2023.

For FY2022, Apple reported $394 billion in sales. For the same period, the company’s operating cash flow was $122 billion. With nearly $170 billion in cash and equivalents, financial flexibility is robust. This provides Apple with ample headroom for dividend growth and aggressive share repurchase.

At the same time, Apple is positioned to continue investing heavily in innovation. It’s worth noting that Apple is increasingly diversified, with the wearable and services segment contributing to growth. However, the iPhone segment remains the cash cow.

There is continued speculation on Apple’s entry into the electric vehicle segment. It was recently rumored that the company’s self-driving car launch had been pushed back to 2026. This is another potential segment for growth acceleration in the next few years.

On the date of publication, Faisal Humayun did not hold (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.