What should investors be looking for when it comes choosing the best dividend stocks?
At Morningstar, we think that the best dividend stocks aren’t simply the highest dividend stocks. Instead, we suggest 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 really screen for dividend durability, reliability going forward.”
David Harrell, 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,” says Harrell.
Given ongoing economic uncertainty and stock market volatility, investors looking for the best dividend stocks today 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 for less than what they’re worth.
10 Best Dividend Stocks Today
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 constituents, and they’re also trading below our fair value estimates.
- Verizon Communications VZ
- Pfizer PFE
- Comcast CMCSA
- Gilead Sciences GILD
- Medtronic MDT
- Duke Energy DUK
- Blackstone BX
- Truist Financial TFC
- Dow DOW
- American Electric Power AEP
Here’s a little bit about each stock, along with some key Morningstar metrics. All data is through April 7, 2023.
Verizon Communications
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Low
- Forward Dividend Yield: 6.61%
- Industry: Telecom Services
Verizon tops our list of the best dividend stocks, trading a whopping 31% below our fair value estimate of US$57. We think the market is overly focused on Verizon’s challenges to add postpaid consumer wireless customers, says Morningstar director Mike Hodel. Hodel expects margins and cash flow to move higher as network projects are completed and the promotional environment eases. This dividend stock offers the highest forward yield on our list; Hodel observes that 50% to 60% of Verizon’s free cash flow is committed to the dividend.
Pfizer
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Forward Dividend Yield: 3.95%
- Industry: Drug Manufacturers—General
We think Pfizer stock is worth US$48 per share; the stock currently trades about 14% below that. We don’t think the market fully appreciates the pharmaceutical giant’s ability to offset major patent losses over the next five years, argues Morningstar director Damien Conover. He believes that Pfizer’s dividend is where it should be, as the company targets close to a 50% payout in dividends as a percentage of normalized earnings—on track for a mature industry.
Comcast
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Forward Dividend Yield: 3.08%
- Industry: Telecom Services
We think Comcast stock is a buy, as shares trade 37% below our US$60 fair value estimate. While broadband customer growth is anemic and NBC Universal is challenged, we think Comcast is well positioned to limit broadband share losses and enjoy solid pricing power, says Hodel. Comcast instituted a dividend in 2008 and has increased its payout 17% annually, on average, notes Hodel, and we think the balance sheet is sound and shareholder returns are generally appropriate.
Gilead Sciences
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Forward Dividend Yield: 3.60%
- Industry: Drug Manufacturers—General
Gilead stock is undervalued, with shares trading about 14% below our fair value estimate of US$97 per share. The company generates outstanding profit margins with its HIV and HCV portfolio, and its portfolio and pipeline support a wide economic moat rating, says Morningstar strategist Karen Andersen. The company has steadily increased its dividend over time; its payout ratio hovers around 50%, which Andersen calls “reasonable.”
Medtronic
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Forward Dividend Yield: 3.39%
- Industry: Medical Devices
Medtronic stock trades 28% below our US$112 fair value. 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, explains Morningstar senior analyst Debbie Wang. Medtronic’s plans to spin off its patient monitoring and respiratory innovations businesses will only help the company pivot more toward faster-growing markets, she adds. Medtronic has raised its dividend for 45 consecutive years.
Duke Energy
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Low
- Forward Dividend Yield: 4.03%
- Industry: Utilities—Regulated Electric
Duke Energy stock is modestly undervalued, trading just 5% below our US$105 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.
Blackstone
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
- Forward Dividend Yield: 5.35%
- Industry: Asset Management
Blackstone stock trades 29% below our fair value estimate of $115. One of the world’s largest alternative asset managers, Blackstone has built a team with decades of industry experience in revitalizing companies through cost-cutting, acquisitions, or other strategic initiatives, says Morningstar strategist Greggory Warren. Redemption requests for Blackstone Real Estate Income have ticked up in the past few months, but we had already been projecting higher redemption rates for that trust given higher interest rates, says Warren. We expect the firm to continue to favor dividend payouts versus share repurchases.
Truist Financial
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
- Forward Dividend Yield: 6.35%
- Industry: Banks—Regional
Truist Financial stock is trading 43% below our fair value estimate of US$57 per share. Morningstar increased its uncertainty rating on Truist and most other regional banks to High from Medium because of funding and regulatory concerns as the bank crisis unfolded. One of the larger regional banks in the U.S., we think Truist has a smaller percentage of deposits at risk when compared with other regional banks, explains Morningstar strategist Eric Compton. But Truist has a higher percentage of unrealized losses on its securities portfolios than some other regional banks and is therefore at risk if regulators create new rules to crack down on banks with sizable unrealized losses. We nevertheless expect Truist to remain profitable and cover its dividend, concludes Compton.
Dow
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
- Forward Dividend Yield: 5.12%
- Industry: Chemicals
Dow stock currently trades 24% below our US$72 fair value estimate. One of the largest chemicals producers in the world, Dow has carved out a narrow economic moat thanks to cost advantages derived from its ethylene and propylene manufacturing operations in North America. While the firm faced headwinds from inflation, the economy and geopolitical concerns in 2022, we think these headwinds are abating and expect favorable prospects in 2024 and beyond, notes Morningstar analyst Katherine Olexa. The firm has maintained a healthy balance sheet and has paid out a flat $2.80 in dividends per share the past three years, which we view as sustainable.
American Electric Power
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Low
- Forward Dividend Yield: 3.50%
- Industry: Utilities—Regulated Electric
American Electric Power stock is just barely undervalued, trading 2% below our US$97 fair value estimate. One of the largest regulated utilities in the U.S., AEP operates numerous utilities and provides investors with protection from any one adverse regulatory ruling, argues Bischof. The company is reviewing its businesses and reallocating capital to more attractive growth opportunities, such as electric transmission and distribution infrastructure. Bischof adds that the company’s dividend policy to pay out 60% to 70% of earnings is appropriate, and we expect the balance sheet to remain sound.
