Buy these 42 stocks in BMO's market-crushing US dividend growth portfolio to earn income and hedge against high prices in 2023

  • Stocks are rebounding early in 2023 after inflation data fell as expected in December.
  • But BMO Capital Markets strategy chief Brian Belski thinks the S&P 500 could retest its lows.
  • Here are the 42 stocks in BMO’s US dividend growth portfolio, which beat the market soundly in 2022.

US stocks have risen just under 4% so far in 2023, which is a better start than even one of Wall Street’s biggest bulls predicted.

Brian Belski, chief investment strategist of BMO Capital Markets, has one of the highest year-end S&P 500 price targets on Wall Street at 4,300. But despite that bullish call he was still concerned about choppy trading in the first half of the year as worries about a weakening economy and lower earnings outweighed positive news about softer inflation and fewer interest rate hikes.

However, investors may have already come to terms with those concerns, Belski recently wrote.

“We think some of this price weakness was pulled forward in December, and therefore foresee the potential market bottom occurring earlier in the year than previously anticipated, setting up a fairly decent second part of 2023,” Belski wrote in a January 11 note.

Still, Belski is keeping his optimism in check. He doesn’t see easy gains ahead for the S&P 500 and wrote that it will be tough for the index to end the year anywhere near its all-time highs, particularly if the Federal Reserve keeps rates stubbornly high — even if inflation continues to decline.

“While we welcomed the recent CPI reports, a couple of better-than-expected prints do not necessarily signal the all clear, in our view,” Belski wrote. “From our perspective, the Fed has been crystal clear in its intentions — which means at least a few more FOMC meetings of rate hikes followed by a prolonged pause period, something that we do not believe the market has fully discounted.”

Belski said to expect abnormal volatility until inflation is back near normal levels, and added that it’s possible that the S&P 500 retests its cycle low of about 3,500 before setting a new one.

Investors will need to pick stocks carefully in this environment, Belski wrote — especially if earnings fall by 5%, which is what he’s calling for as profit margins contract.

42 stocks to buy for dividend growth

In addition to writing research notes, strategists at BMO Capital Markets have created several model investment portfolios that are used to showcase their views. Unlike other lists of stock picks, the firm tracks how these stocks perform together over time instead of just on their own.

One such model, the US dividend growth portfolio, beat the S&P 500 convincingly in 2022, falling just 5.4% after dividends compared to the index’s -18.1% total return. And in 2021, the US dividend growth portfolio matched the S&P 500’s performance exactly by rising 28.7%.

Smart sector allocation and prudent stock-picking were crucial to the portfolio’s success. BMO’s US dividend growth portfolio benefited from its overweight in the financials sector and its underweight of the information technology sector, as well as its careful positioning within consumer discretionary and communication services. However, the portfolio’s tiny 2% position in energy kept gains in check last year.

Still, Belski noted that 30 of the 42 stocks held in BMO’s US dividend growth portfolio topped the S&P 500 in the fourth quarter. Even more impressive is that the portfolio has a price-to-earnings multiple of 16.1x, which is below the index’s 16.7x, while also earning a 3% dividend yield that’s nearly twice as large as the S&P 500’s 1.6% yield.

BMO US div growth 2

BMO Capital Markets

BMO US div growth 1

BMO Capital Markets

Additionally, BMO’s US dividend growth portfolio has shown a knack for generating returns during times of market volatility and has outperformed the S&P 500 over time in every market setting.

Below are the 42 stocks in BMO Capital Markets’ market-beating US dividend growth portfolio right now, along with the ticker, market capitalization, sector, and dividend yield for each.