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 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 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 to Buy
To find the best U.S. 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 Oct. 13, 2023.
- Verizon Communications VZ
- Coca-Cola KO
- PepsiCo PEP
- Altria Group MO
- Wells Fargo WFC
- Comcast CMCSA
- Bristol-Myers Squibb BMY
- United Parcel Service UPS
- Gilead Sciences GILD
- Medtronic MDT
Here’s a little bit about each cheap dividend stock, along with some key Morningstar metrics. All data is through Oct. 13, 2023.
Verizon Communications
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 8.39%
- Industry: Telecom Services
Verizon tops our list of the best dividend stocks to buy. This cheap dividend stock (which is also the fifth-largest holding in the Morningstar Dividend Yield Focus Index) is trading a whopping 42% 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 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.
Coca-Cola
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Low
- Trailing Dividend Yield: 3.41%
- Industry: Beverages—Non-Alcoholic
Cola-Cola is the first of five new names on our list of the best dividend stocks this month. The firm’s impressive brand portfolio, pricing power, and retailer relationships underpin its wide economic moat rating, says Morningstar analyst Dan Su. We expect few price hikes in the coming quarters as cost inflation eases and believe Coke is well-positioned with its dual-pronged strategies on both premium and value products. Coke has raised its dividend for 61 consecutive years and therefore qualifies as a Dividend Aristocrat. We expect dividend payments to grow in line with earnings growth (the mid to high single digits) during the next five years, adds Su. We think Coca-Cola stock is worth $60.
PepsiCo
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Low
- Trailing Dividend Yield: 3.00%
- Industry: Beverages—Non-Alcoholic
Coke rival Pepsi is also a new addition to this month’s list of the best dividend stocks to buy; it, too, is a Dividend Aristocrat. Pepsi notched good results in the most recent quarter thanks to snack and beverage innovations, its flexible channel strategy, and efficiency gains, notes Morningstar analyst Dan Su. We think Pepsi stock is worth $180, and shares trade below that. Pepsi has raised its dividend for 51 consecutive years, and we expect dividend payments to grow at 8% annually over the next decade, says Su.
Altria Group
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 8.86%
- Industry: Tobacco
This month’s highest-yielding stock on our list of the best dividend stocks to buy (and also a newcomer), Altria is trading 18% below our fair value estimate of $52. The leading tobacco maker in the United States, Altria is pursuing a multipronged approach to cigarette substitutes, points out Morningstar director Philip Gorham. 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 dividend, he adds. Gorham says that dividends are the company’s top capital allocation priority, with a stated payout ratio target of 80%.
Wells Fargo
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 3.00%
- Industry: Banks—Diversified
Wells Fargo is the only bank on our list of cheap dividend stocks, trading 32% below our $61 fair value estimate. Third-quarter earnings were similar to last quarter’s, with both the expense outlook and net interest income rising, notes Morningstar strategist Eric Compton. Compton says that Wells Fargo’s balance sheet is strong and calls the bank’s current dividend strategy “appropriate.” While the bank did have to cut its dividend because of coronavirus-era restrictions, its new dividend policy is manageable, he concludes.
Comcast
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 2.58%
- Industry: Telecom Services
Comcast stock trades 26% below our $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.
Bristol-Myers Squibb
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 3.99%
- Industry: Drug Manufacturers—General
The first of three healthcare stocks on our list of undervalued dividend stocks to buy, Bristol-Myers Squibb trades 13% below our fair value estimate of $66. The company has built a strong portfolio of drugs and a robust pipeline through adept acquisitions, explains Morningstar director Damien Conover. Its lineup of patent-protected drugs, entrenched salesforce, and economies of scale underpin its Morningstar Economic Moat Rating of wide. While the firm’s 30% payout ratio rests below the industry average of 50%, we think the level is actually about right, as upcoming patent losses will drive the payout ratio closer to average over the next five years, concludes Conover.
United Parcel Service
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 4.07%
- Industry: Integrated Freight & Logistics
The world’s largest parcel delivery company makes its debut on our list of the best dividend stocks to buy. We assign UPS stock a $172 fair value estimate, and shares trade about 9% below that. UPS produces operating margins well above those of its competitors, observes Morningstar senior analyst Matthew Young, and we expect favorable e-commerce trends to remain a longer-term top-line tailwind for the company. Young adds that the balance sheet is sound and distributions are appropriate.
Gilead Sciences
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 3.76%
- Industry: Drug Manufacturers—General
Gilead stock is a cheap dividend stock from the healthcare sector, with its shares trading about 18% below our fair value estimate of $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: 5 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 3.82%
- Industry: Medical Devices
Medtronic rounds out our list of cheap dividend stocks, trading 36% below our $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, earning it Dividend Aristocrat status.
