As the New Year approaches, I am looking for stocks that can boost the income from my portfolio. These holdings can be a great way to diversify away from the normal growth and value sectors. Also, 2023 could be as tricky as this year has been. So having a small number of high-quality holdings delivering consistent income could help with my overall annual performance.
I have a few core requirements that should allow me to find a productive new holding from a dividend perspective. I want a dividend that has been paid consistently for many years. Furthermore, I want this yield to increase in the next financial year. I also want a track record of year on year growth. This is useful for identifying the higher-quality income shares within an index.
Smurfit Kappa Group
The first company on my list is Smurfit Kappa Group (LSE: SKG). A manufacturer of paper-based packing products operating in the UK, Europe and America. The stock has performed well for the last few years. However, 2022 has been challenging, with the price falling almost 22%. Despite this, the underlying fundamentals are attractive, with solid forecast earnings growth and reasonable profit margins.
However, the dividend potential has grabbed my attention most. Smurfit has a yield of 3.5%, and has paid out consistently for 11 years. The payout has also grown for 10 years. Its yield is forecast to grow by 14.5% to 4% next year, significantly above its three-year average growth rate. Also, its yield should be covered by earnings per share (EPS) as much as 2.7 times.
On the negative side, it has slightly more debt than I am happy with. Its debt is currently sat at 40% of its market capitalisation. And despite the share price fall in 2022, its price-to-earnings (P/E) ratio is almost 14. This could still fall further before being undervalued.
Nonetheless, I still believe the company represents an excellent opportunity for generating income. I am keen to add it to my portfolio in 2023.
The second company on my list is CRH (LSE: CRH), a global manufacturer of building products. After a solid performance over the last few years, the stock has struggled this year, down almost 14%. Yet its underlying fundamentals are solid. It high free cash conversion, reasonable profit margins and strong return on capital employed (ROCE).
Its dividend potential is also appealing with a current yield of 3.1%. This has been paid consistently for the last 29 years and has grown for the previous six. Furthermore, it is forecast to grow by over 14% in 2023. It would have comfortable dividend cover of 2.4 in 2023.
Once again though, its current debt level of almost 41% of market capitalisation could pressure future dividends if earnings decline. I am likely to wait until the share price begins to stabilise before buying as recent increased volatility could lead mean further falls to come.
However, I believe CRH presents an excellent income opportunity for my 2023 portfolio. So I will probably add it to my portfolio in the New Year
Gabriel McKeown has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2022