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UK dividends jumped 16.5% in 2022! How to find the best dividend shares in 2023

Young happy people looking at sparklers in their hands on New Year's Eve

Despite the 2022 bloodbath for growth stocks, UK dividend shares enjoyed a far more pleasant year. Apart from reduced stock price volatility, investors reaped record-high dividend payouts not seen since 2019.

According to a report by Link Group, a total of £94.3bn of dividends were issued last year. That’s 8% higher than in 2021. When excluding one-time payments, payouts came in at £84.8bn – a 16.5% growth.

Moreover, forecasts predict this figure will continue to grow in 2023, even with inflation making life difficult for businesses and consumers.

As such, investing in top-notch income stocks in 2023 could be a lucrative move, especially since depressed valuations are currently offering far higher yields.

Finding the best income opportunities

The easiest way to capitalise on expected dividend growth is to simply invest in a low-cost FTSE 100 index fund. After all, the UK’s flagship index is home to some of the largest dividend shares on the London Stock Exchange. Yet this approach may only touch the tip of the iceberg.

Investors can unlock significantly higher portfolio yields by picking individual stocks. But which industries present the best opportunities? Looking at the report, only a handful of sectors seem to be driving the bulk of dividend growth.

Sector 2022 Underlying Dividend Growth
Banks & Financials 57%
Telecommunications 30%
Energy 21%

With central banks hiking interest rates to combat inflation, institutions are again enjoying a favourable lending environment that hasn’t been seen in over a decade. Meanwhile, 5G continues quietly rolling out, providing telecom companies with ample and even excess cash flow. And the energy sector has profited greatly from surging electricity prices, even after windfall taxes.

This growth level is expected to taper moving into 2023, as inflation slowly gets under control. However, the long-term demand for banking, communication networks, and energy will likely continue rising. Therefore, these sectors seem like excellent places to hunt for lucrative income opportunities.

Getting rich with UK dividend shares

Finding high-yield opportunities in the banking, telecom, and energy sectors is the easy bit. The challenge is determining whether shareholder payouts can be maintained in the short term and expanded in the long.

Investigating a company’s cash flow is one of the most critical steps. It’s even more important than earnings, in my opinion. Don’t forget businesses don’t go bankrupt because they’re unprofitable, but rather because they run out of cash.

While interest rates are helping banks, other capital-intensive sectors, like telecom and energy, are starting to feel the pinch, especially those with large debt piles. Firms riddled with variable-rate loans may see profit margins squeezed as their interest expense climbs.

With less excess cash flow to fund shareholder dividends, these debt-heavy businesses are far less attractive, even if the yield is high today. But for dividend shares with healthy balance sheets and plenty of free cash flow generation, a lucrative investment opportunity may exist.

The post UK dividends jumped 16.5% in 2022! How to find the best dividend shares in 2023 appeared first on The Motley Fool UK.

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See the full investment case

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Zaven Boyrazian 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.