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What should investors look for to find the best dividend stocks?
At Morningstar, we believe that the best dividend stocks aren’t just those with the highest yield. Instead, we suggest investors look beyond stock returns, pick stocks with sustainable dividends, and buy those stocks when they are undervalued.
“It’s important to be selective when it comes to buying dividend stocks and looking for yield,” says Dan Lefkovitz, strategist at Morningstar Indexes.
Searching for the highest yielding market segments can often lead you to trouble spots and dividend traps—companies that have a nice yield but are ultimately unsustainable. You need to look for sustainability and reliability of long-term dividends.
David Harrell, editor-in-chief of Morningstar DividendInvestor, suggests focusing on companies whose management teams support their dividend strategy and favoring those with competitive advantages or an economic moat.
“Obviously, moat ratings do not guarantee dividend payouts, but we have observed very strong correlations between economic moats and dividend sustainability,” says David Harrell.
Given the economic uncertainty and stock market volatility, investors looking for the best dividend stocks today might want to consider adding quality dividend stocks that are undervalued to their portfolios. After all, quality companies have the financial stability to maintain their dividends in tough economic times, and price risk is reduced when investors can buy shares of these companies at low prices.
Today’s Top 10 Dividend Stocks
To find the best dividend stocks, we look at the Morningstar Dividend Yield Focus Index. The dividend stocks on this list are among the best constituents of the index and were also undervalued, with Morningstar Ratings of 4 and 5 stars as of September 13, 2023.
- Verizon Communications (VZ)
- Pfizer (PFE)
- Comcast (CMCSA)
- Wells Fargo (WFC)
- Gilead Sciences (GILD)
- Medtronic (MDT)
- Devon Energy (DVN)
- Dow (DOW)
- Public Service Enterprise Group (PEG)
- energy WEC (WEC)
Here’s some information on these cheap dividend stocks and some key indicators as of September 13, 2023.
Verizon Communications
Morningstar rating: 5 stars
Morningstar economic moat: low
Morningstar Uncertainty Rating: Medium
Forward Dividend Yield: 7.09%
Industry: Telecommunications Services
Verizon leads our list of the best dividend stocks. This cheap dividend stock (which is also the fourth-largest holding in the Morningstar Dividend Yield Focus Index) trades at a 37% discount to our $54 fair value estimate. We think the market is focusing too much on Verizon’s trouble adding customers to its paid wireless service and its exposure to lead-jacketed wiring, says Morningstar director Mike Hodel — although the issue of lead-jacketed cables certainly adds to the uncertainty surrounding the move. he adds. Verizon reported strong second-quarter results, and Mike Hodel expects margins and cash flow to grow as network projects are completed and the promotional environment eases. Mike Hodel notes that 50 to 60% of Verizon’s free cash flow goes to dividends.
Pfizer