What should investors be looking for when it comes to choosing the best dividend stocks?
At Morningstar, we think that the best dividend stocks aren’t simply the highest-yielding dividend stocks. Instead, we suggest that investors look beyond a stock’s yield and instead choose stocks with durable dividends and buy those stocks when they’re undervalued.
“It’s really critical to be selective when it comes to buying dividend-paying stocks and chasing yield,” explains Dan Lefkovitz, a strategist for Morningstar Indexes. “Looking for the most yield-rich areas of the market can often lead you into troubled areas and dividend traps—companies that have a nice-looking yield that is ultimately unsustainable. You have to screen for dividend durability and reliability going forward.”
David Harrell, the editor of Morningstar DividendInvestor, suggests focusing on companies with management teams that are supportive of their dividend strategies and favoring companies with competitive advantages, or economic moats.
“A moat rating does not guarantee dividends, of course, but we have seen some very strong correlations between economic moats and dividend durability,” Harrell says.
Given ongoing economic uncertainty and stock market volatility, investors looking for the best dividend stocks might consider adding undervalued, quality dividend stocks to their portfolios. After all, quality companies have the financial stability to maintain their dividends during questionable economic periods, and price risk is reduced when investors can buy the stocks of these companies on the cheap.
10 Best Dividend Stocks to Buy
To find the best dividend stocks, we turn to the Morningstar Dividend Yield Focus Index. The dividend stocks on this list are among the index’s top constituents, and they were also undervalued, with Morningstar Ratings of 4 and 5 stars as of April 12, 2024.
- Verizon Communications VZ
- Johnson & Johnson JNJ
- Philip Morris International PM
- Altria Group MO
- Comcast CMCSA
- Medtronic MDT
- Pioneer Natural Resources PXD
- Duke Energy DUK
- PNC Financial Services PNC
- Kinder Morgan KMI
Here’s a little bit about each cheap dividend stock, along with some key Morningstar metrics. All data is through April 12, 2024.
Verizon Communications
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 6.53%
- Industry: Telecom Services
Verizon tops our list of the best dividend stocks to buy, trading a whopping 26% below our fair value estimate of $54 per share. We think the market is overly focused on Verizon’s challenges to add postpaid consumer wireless customers, says Morningstar director Mike Hodel. Hodel argues that the improving competitive balance in the wireless industry will allow the major US carriers to boost profitability in the years ahead. Verizon’s fourth-quarter results showcased stellar free cash flows. Hodel observes that Verizon directed 60% of 2023′s cash flows to the dividend.
3 Dividend Stocks for April 2024
The dividend prospects of three firms with wide or narrow Morningstar Economic Moat Ratings.
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Johnson & Johnson
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Low
- Trailing Dividend Yield: 3.13%
- Industry: Drug Manufacturers—General
Johnson & Johnson is among the dividend aristocrats on our list of cheap dividend stocks; dividend aristocrats are companies that have raised their dividends for at least 25 consecutive years. The stock is trading about 10% below our fair value estimate of $164 per share. With a diverse revenue base, solid pipeline, and exceptional cash flow, the company earns a wide economic moat rating, says Morningstar director Damien Conover. Conover notes that the market is underestimating the company’s solid pipeline and calls Johnson & Johnson’s dividends (and share repurchases) “about right.”
Philip Morris International
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 5.68%
- Industry: Tobacco
Philip Morris International is the first of two tobacco firms on our list of cheap dividend stocks, trading 14% below our $103 fair value estimate. The company aims to generate more than half of its revenue from combustibles by 2025, which may be ambitious, says Morningstar strategist Kris Inton. Fourth-quarter results were slightly ahead of our expectations, but 2024 guidance suggested a slowdown in adjusted earnings growth. We expect the company to increase the dividend at a high-single-digit growth rate.
Altria Group
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 9.21%
- Industry: Tobacco
This month’s highest-yielding stock on our list of the best dividend stocks to buy, Altria is trading 16% below our fair value estimate of $49 per share. The leading tobacco maker in the United States, Altria is pursuing a multipronged approach to cigarette substitutes, points out Morningstar’s Inton. The ability to consistently price above its rate of cigarette volume declines should ensure that the company can continue to increase its revenue, earnings, and the dividend, he adds. Inton says that dividends are the company’s top capital-allocation priority, with a stated payout ratio target of 80%.
Comcast
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 2.94%
- Industry: Telecom Services
Comcast stock trades 34% below our $60 fair value estimate. Morningstar director Mike Hodel argues that pricing power remains the most important factor driving Comcast’s performance. Accepting modest customer losses while maintaining steady growth in revenue per customer has helped to offset uncertainty around the company’s Peaco*ck streaming service. Comcast instituted a dividend in 2008 and has increased its payout by 15% annually, on average, notes Hodel. We think the balance sheet is sound, and shareholder returns are generally appropriate.
Medtronic
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 3.29%
- Industry: Medical Devices
Medtronic stock trades 28% below our $112 fair value estimate. The largest pure-play medical-device maker is a key partner for its hospital customers, thanks to its diversified product portfolio aimed at a wide range of chronic diseases, Morningstar senior analyst Debbie Wang explains. Medtronic has raised its dividend for 46 consecutive years, earning it dividend aristocrat status.
Pioneer Natural Resources
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 4.02%
- Industry: Oil & Gas E&P
Pioneer Natural Resources is a cheap dividend stock to buy, trading 12% below our $309 fair value estimate. Pioneer will be acquired by Exxon Mobil XOM by mid-2024 in an all-stock deal. Our fair value estimate for Pioneer stock represents the product of Exxon shares that Pioneer shareholders will receive and our Exxon fair value estimate, explains Morningstar director Josh Aguilar.
Duke Energy
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Low
- Trailing Dividend Yield: 4.19%
- Industry: Utilities—Regulated Electric
Duke Energy stock is trading 15% below our $112 fair value estimate. One of the largest regulated utilities in the United States, Duke has carved out a narrow economic moat because of the constructive regulatory environments in which much of its regulated business operates and better-than-average economic fundamentals in its key regions, explains Morningstar strategist Andrew Bischof. The company’s balance sheet is strong, and its dividend policy to pay out 65% to 75% of earnings is appropriate, he adds.
PNC Financial Services
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 3.81%
- Industry: Banks—Regional
PNC Financial Services is a newcomer to our list of the best dividend stocks to buy. One of the larger regional banks in the US, PNC has a fairly diversified fee base, notes Morningstar analyst Suryansh Sharma. We think its balance sheet is well positioned for the current interest-rate cycle, he adds. PNC’s capital return strategy has been appropriate from Morningstar’s perspective. PNC stock trades 14% below our fair value estimate of $175 per share.
Kinder Morgan
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 6.19%
- Industry: Oil & Gas Midstream
Kinder Morgan rounds out our list of the best dividend stocks to buy—it’s a newcomer to the list this month, too. Kinder Morgan’s assets span natural gas, natural gas liquids, oil, and liquefied natural gas, but we think the company’s US gas pipeline business is most impressive, observes Morningstar strategist Stephen Ellis. We anticipate a 2%-3% dividend-growth rate ahead. We think the stock is worth $20 and shares trade 9% below that.
What Is the Morningstar Dividend Yield Focus Index?
A subset of the Morningstar US Market Index (which represents 97% of equity market capitalization), the Morningstar Dividend Yield Focus Index tracks the top 75 high-yielding stocks that meet our screening requirements for quality and financial health.
How are the stocks selected for the index? Only securities whose dividends are qualified income are included; real estate investment trusts are tossed out. Companies are then screened for quality using the Morningstar Economic Moat and Morningstar Uncertainty Ratings. Specifically, companies must earn a moat rating of narrow or wide and an Uncertainty Rating of Low, Medium, or High; companies with Very High or Extreme Uncertainty Ratings are excluded. The index includes a screen for financial health using a distance-to-default measure, which uses market information and accounting data to determine how likely a firm is to default on its liabilities; it is a measure of balance-sheet strength.
The 75 highest-yielding stocks that pass the quality screen are included in the index, and constituents are weighted according to the total dividends paid by the company to investors.
The Best Dividend Stocks: More Ideas to Consider
Investors who would like to uncover more cheap dividend stocks to research further can do the following:
- Review the full list of dividend stocks included in the Morningstar Dividend Yield Focus Index. Those dividend stocks with Morningstar Ratings of 4 or 5 stars are undervalued, according to our metrics.
- Use our Morningstar Investor Screener tool to find the best dividend stocks according to your specific criteria. You can search for stocks based on their dividend yields, valuation measures such as price/earnings, and more.
- Use Morningstar Investor to build a watchlist of the best dividend stocks and create a view that allows you to easily follow the valuations, ratings, and dividend yields of the stocks on your list.
- Watch our dividend stock video series, hosted by David Harrell, for ideas to consider.
- Bookmark our dividends topic page to stay up-to-date on Morningstar’s newest dividend stock content.
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