What should investors be looking for when it comes to choosing the best dividend stocks?
At Morningstar, we think the best dividend stocks aren’t simply the highest-yielding ones. Instead, we suggest investors look beyond a stock’s yield, 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 must 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 favouring 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 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 on the cheap.
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 top constituents, and they were also undervalued, with Morningstar Ratings of 4 and 5 stars as of Sept. 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
WEC Energy WEC
Here’s a bit about each cheap dividend stock and some key Morningstar metrics. All data is through Sept. 13, 2023.
Verizon Communications
Morningstar Rating: 5 stars
Morningstar Economic Moat Rating: Narrow
Morningstar Uncertainty Rating: Medium
Forward Dividend Yield: 7.09%
Industry: Telecom Services
Verizon tops 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) is trading a whopping 37% below our fair value estimate of US$54 per share. We think the market is overly focused on Verizon’s challenges to add postpaid consumer wireless customers and its exposure to lead-sheathed cabling, says Morningstar director Mike Hodel—though the lead-sheathed cabling issue does increase uncertainty around the stock, he adds. Verizon posted solid second-quarter results, and Hodel expects margins and cash flow to move higher as network projects are completed and the promotional environment eases. 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: 4.52%
Industry: Drug Manufacturers—General
We think Pfizer stock is worth US$48 per share, and it currently trades about 29% 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. Second-quarter results were mixed, owing to lower COVID-19 vaccine and treatment sales; Conover notes that Pfizer has contingency plans in place to cut costs if COVID-related sales don’t improve in the third quarter. 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: 4 stars
Morningstar Economic Moat Rating: Wide
Morningstar Uncertainty Rating: Medium
Forward Dividend Yield: 2.78%
Industry: Telecom Services
Comcast stock trades 25% below our US$60 fair value estimate. The company’s second-quarter results were better than expected, with net broadband customer losses smaller than anticipated. We think Comcast is well positioned to limit broadband share losses and enjoy solid pricing power, says Morningstar’s Hodel. Comcast instituted a dividend in 2008 and has increased its payout by 17% annually, on average, notes Hodel. We think the balance sheet is sound, and shareholder returns are generally appropriate.
Wells Fargo
Morningstar Rating: 5 stars
Morningstar Economic Moat Rating: Wide
Morningstar Uncertainty Rating: Medium
Forward Dividend Yield: 2.95%
Industry: Banks—Diversified
Wells Fargo is the only bank on our list of cheap dividend stocks, trading 31% below our US$61 fair value estimate. During the second quarter, Wells Fargo’s net interest income outperformed despite rising expenses, notes Morningstar strategist Eric Compton. Compton says that Wells Fargo’s balance sheet is strong and calls the bank’s current dividend strategy “appropriate.” He adds that Wells is doing a fine job on the share-repurchase front, too, buying roughly 2.6% of its outstanding shares this past quarter.
Gilead Sciences
Morningstar Rating: 4 stars
Morningstar Economic Moat Rating: Wide
Morningstar Uncertainty Rating: Medium
Forward Dividend Yield: 3.94%
Industry: Drug Manufacturers—General
Gilead stock is a cheap dividend stock from the healthcare sector, with its shares trading about 20% 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 Morningstar Economic Moat Rating, says Morningstar strategist Karen Andersen. Second-quarter results came in strong. 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: 3.20%
Industry: Medical Devices
Medtronic is a cheap dividend stock, trading 27% 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, Morningstar senior analyst Debbie Wang explains. 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. Results were solid in the most recent quarter, and we think the recent uptick in medical utilization following the pandemic should continue through fiscal 2024, says Wang. Medtronic has raised its dividend for 46 consecutive years.
Devon Energy
Morningstar Rating: 4 stars
Morningstar Economic Moat Rating: Narrow
Morningstar Uncertainty Rating: High
Forward Dividend Yield: 9.46%
Industry: Oil & Gas E&P
Devon Energy is the first of two newcomers this month to our list of the best dividend stocks, with its stock trading 17% below our fair value estimate of US$61 per share. Devon Energy is one of the largest exploration and production companies in the United States. Given its cost advantages, we assign the firm a narrow economic moat rating, explains Morningstar analyst Katherine Olexa. We think the balance sheet is relatively strong, and like many E&P firms, Devon Energy follows a “fixed plus variable” dividend strategy, which calibrates its returns to shareholders with the commodity cycle, she adds.
Dow
Morningstar Rating: 4 stars
Morningstar Economic Moat Rating: Narrow
Morningstar Uncertainty Rating: Medium
Forward Dividend Yield: 5.29%
Industry: Chemicals
Dow stock is trading 27% below our US$72 fair value estimate. It’s also one of Morningstar’s top 33 undervalued stocks for the third quarter of 2023. One of the largest chemicals producers in the world, Dow has carved out a narrow economic moat owing to the cost advantages of its ethylene and propylene manufacturing operations in North America, explains Morningstar’s Olexa. Economic slowdowns hurt second-quarter performance, but we expect to see improvements along with the global economy in 2024, she says. The company has paid dividends of US$2.80 per share in the past three years, which we expect to continue, says Olexa—though we think management will prioritize the dividend moving forward, she adds.
Public Service Enterprise Group
Morningstar Rating: 4 stars
Morningstar Economic Moat Rating: Narrow
Morningstar Uncertainty Rating: Low
Forward Dividend Yield: 3.71%
Industry: Utilities—Regulated Electric
The first cheap dividend stock on our list from the utilities sector and our second newcomer this month, Public Service Enterprise Group is trading 6% below our US$65 fair value estimate. We expect the company’s investments in energy infrastructure and clean energy at its rate-regulated New Jersey utility during the next five years to drive 7% annual earnings growth, says Morningstar strategist Travis Miller. He adds that management’s plan to allocate the bulk of its investment to the rate-regulated utility and dividend growth is a positive for shareholders.
WEC Energy
Morningstar Rating: 4 stars
Morningstar Economic Moat Rating: Narrow
Morningstar Uncertainty Rating: Low
Forward Dividend Yield: 3.57%
Industry: Utilities—Regulated Electric
WEC Energy rounds out our list of the best dividend stocks, trading 11% below our fair value estimate of US$96. The largest Midwest utility, WEC has built a narrow economic moat with service territory monopolies and efficient scale advantages, says Morningstar strategist Andrew Bischof. The company enjoyed a strong second quarter. We consider the firm’s 65%-70% payout ratio to be appropriate, given the high-quality and stable nature of the company’s regulated assets. And we think the company’s management team has done an exemplary job of allocating capital.
