Down 19% to 36%, These 3 Blue Chip Dividend Stocks Are No-Brainer Buys for 2023 | The Motley Fool (2024)

With 2022 in the books, many investors are probably thankful that the worst calendar year for the stock market since 2008 is over.

Although the stock market rarely posts back-to-back down years, it could still happen. So buying quality companies and holding them through periods of volatility is paramount for outlasting a prolonged bear market.

United Parcel Service (UPS 0.36%), Target (TGT -1.06%), and Home Depot (HD -0.85%) are three blue chip dividend stocks that are on sale now. We asked these three Motley Fool contributors to offer their reasons why each company is worth a look for 2023 and beyond.

UPS offers a handsome dividend and a business in transformation

Lee Samaha (UPS): I know what you're thinking, and you have a good reason to be thinking that. Buying a transportation stock while the economy is slowing is not often seen as a great move. The transportation sector, particularly package deliveries, is a cyclical activity. Less economic growth means fewer packages sent.

However, with the S&P 500 falling 19.4% in 2022, a lot of the bad news is already in the price. Moreover, the fall in the share price doesn't reflect a lot of the underlying improvement management has made in the business over the last few years.

The critical question with UPS and its peers in recent years has been whether they could grow volumes (particularly e-commerce deliveries) and grow margins and cash flow simultaneously. Unfortunately, doing so is not a given. For example, business-to-consumer (B2C) deliveries often involve bulky and inefficiently packaged, costly to-deliver parcels delivered to myriad addresses. In addition, handling massive volume growth necessitates significant investment in capacity expansion.

In response to these pressures, UPS has transformed its business by focusing on key growth areas like small and medium-sized businesses, healthcare, and business-to-business (B2B) deliveries. At the same time, management has shown a willingness to eschew less profitable deliveries and focus on sweating its existing assets. As previously noted, UPS volumes are declining in the U.S., but profits and income keep rising. A testimony to the improvement in the underlying business.

All told, there's little management can do about a slowing economy, but it can improve its underlying business to ensure it will be more profitable through the cycle. That's precisely what the company is doing, making it a buy for long-term investors keen on getting a 3.4% yield while UPS keeps improving its business

Target's shrinking margins are a red flag, but the fundamentals are intact

Daniel Foelber (Target): Down 44% from its all-time high and 35.6% last year, Target stock had an abysmal 2022. Most of the damage was done in the first half of the year when the extent of inventory issues and inflation became apparent. Over the last six months, Target stock is nearly flat.

Consumer discretionary companies like Target tend to get hit hard by a recession. So, if unemployment rises next year and inflation keeps up, it wouldn't be surprising if Target's numbers come in below expectations. So while there's no rush to dive head first into Target stock now, it's worth mentioning that the underlying investment thesis hasn't changed.

Target has done an impressive job of adjusting to e-commerce and curbside pickup trends. In 2021, Target achieved an operating margin of 8.5%, matching its record from 2006. But with much higher revenue in 2021 than 15 years prior, the ability to generate an operating margin that high is all the more impressive. But that was 2021.

TGT Operating Margin (TTM) data by YCharts.

The situation kept getting worse for Target in 2022. In its third-quarter 2022 earnings release, Target guided for a Q4 2022 operating margin of just 3%. Target blames the steep decline in profitability on costs outpacing price increases. Target's inability to manage this year's slew of challenges is a textbook example of the drawbacks of relying on lagging indicators, which in this case underestimated the swiftness and severity of inflation and subsequent rising interest rates.

In many ways, Target's blunders and challenging macroeconomic outlook justified its stock decline. But looking ahead, the stock looks like a compelling buy. Target is a Dividend King with over 50 consecutive years of dividend increases. So investors can count on a steady stream of passive income from its 3% dividend yield. Target is also an industry-leading business with a powerful brand and a strong balance sheet. So it has what it takes to weather the storm.

Target has been through plenty of cycles in the past. This one may be the worst since the financial crisis of 2008. But Target is built to last.

Build a better passive income stream with Home Depot

Scott Levine (Home Depot): After soaring 56% in 2021, shares of Home Depot reversed course in 2022, plunging 24%. Despite its decline, however, this blue chip stock remains a compelling option for income investors, who can scoop up shares with their forward dividend yield of 2.4% on the cheap.

With inflation rising over the past year, the market seems concerned that rising prices may dissuade do-it-yourselfers from performing home improvements. In its Q3 2022 earnings report, Home Depot noted that customer transactions over the previous three quarters had declined 5.1% compared to the same period in 2021. Additionally, some may be concerned about the company's ability to achieve growth considering its already wide footprint in the U.S. market. While these are valid concerns, no stock is without risk, and the merits of an investment in Home Depot outweigh the possible peril.

Although Home Depot may face some near-term pressure from rising prices, there's no escaping the fact that home repairs must be performed. Put off a repair for a little bit, and the likelihood of an even greater repair down the line looms larger. And while the company may not be achieving growth through new store openings, it's providing new offerings to its Pro customers. On the recent conference call, management stated that the company is "building a unique, interconnected Pro ecosystem that will increase our ability to grow share in a $450 billion dollar addressable Pro space."

Over the past 20 years, Home Depot has logged steady growth on both the top and bottom lines.

HD Revenue (Annual) data by YCharts.

And this resilient business should continue to achieve comparable growth in the years to come. With shares changing hands at 18.9 times forward earnings -- a discount to its five-year average multiple of 21.2 -- now seems like a great time to fortify your holdings with this blue chip winner.