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. 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 by at least 5% as of Dec. 6, 2024.
- Exxon Mobil XOM
- Chevron CVX
- Johnson & Johnson JNJ
- PepsiCo PEP
- Merck MRK
- ConocoPhillips COP
- Medtronic MDT
- Dow DOW
- LyondellBasell LYB
- General Mills GIS
Here’s a little bit about each cheap dividend stock, along with some key Morningstar metrics. All data is through Dec. 6.
Exxon Mobil
- Morningstar Rating: 3 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
- Trailing Dividend Yield: 3.38%
- Industry: Oil and Gas Integrated
Exxon Mobil tops our list of the best dividend stocks to buy. Unlike peers that are diverting investment to renewables to achieve long-term carbon intensity reduction targets, Exxon remains committed to oil and gas, explains Morningstar director Allen Good. “While this strategy is unlikely to win praise from environmentally oriented investors, we think it’s more likely to be more successful and probably holds less risk,” he adds. Exxon qualifies as a dividend aristocrat; dividend aristocrats are those companies that have raised their dividends for 25 consecutive years or more. We think the stock is worth $135 per share, and shares trade 15% below that.
Review Exxon Mobil’s dividend history.
Chevron
- Morningstar Rating: 3 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
- Trailing Dividend Yield: 4.20%
- Industry: Oil and Gas Integrated
The second of three energy companies on this month’s list of the best dividend stocks to invest in, Chevron is trading 12% below our fair value estimate of $176 per share. The second-largest oil company in the United States, Chevron plans to acquire Hess, but arbitration around the acquisition has been pushed to 2025, adding some uncertainty to the stock. We think the stock looks attractive nonetheless, says Morningstar’s Good. “We think Chevron has a compelling investment case without Hess, but with it, Chevron has another long-term growth leg it’s currently lacking,” he says. The company also qualifies as a dividend aristocrat.
Review Chevron’s dividend history.
Johnson & Johnson
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Low
- Trailing Dividend Yield: 3.29%
- Industry: Drug Manufacturers—General
Johnson & Johnson is another dividend aristocrat on our list of cheap dividend stocks to invest in. The stock is trading about 9% 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 Karen Andersen. Andersen notes that the market is underestimating the company’s solid pipeline and argues that the company’s recently updated strategy to resolve talc litigation should resolve the risk hanging over the stock. She calls Johnson & Johnson’s dividends (and share repurchases) “about right.”
Review Johnson & Johnson’s dividend history.
PepsiCo
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Low
- Trailing Dividend Yield: 3.38%
- Industry: Beverages—Nonalcoholic
Pepsi is the fourth dividend aristocrat on this month’s list of the best dividend stocks to buy. We think Pepsi stock is worth $174, and shares trade 9% below that. Despite near-term headwinds from consumer belt-tightening in the US, we think PepsiCo remains poised to bolster its competitive standing in beverages and snacks by leveraging marketing and product initiatives, reports Morningstar equity analyst Dan Su. We expect Pepsi’s payout ratio to rise to 72% and dividend payments to increase 7% annually over the next decade, says Su.
Review PepsiCo’s dividend history.
Merck
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 2.99%
- Industry: Drug Manufacturers—General
Merck is the second healthcare stock on our list of the best dividend stocks to invest in, with its stock trading 14% below our fair value estimate of $120 per share. “Patents, economies of scale, and a powerful intellectual base buoy Merck’s business and keep it well shielded from the competition,” says Morningstar’s Andersen. The company’s balance sheet is sound and carries low risk. We expect steady future dividends, supported by a payout ratio of close to 50% relative to adjusted earnings per share, she adds.
Review Merck’s dividend history.
ConocoPhillips
- Morningstar Rating: 3 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
- Trailing Dividend Yield: 2.83%
- Industry: Oil and Gas Exploration and Production
The third energy stock on our list of best dividend stocks to buy, ConocoPhillips stock trades 9% below our $114 fair value estimate. Morningstar’s Good calls the firm “a compelling option in the energy sector, given its commitment to capital restraint and clear policy on the return of cash to shareholders.” ConocoPhillips ties cash returns to cash flow and is committed to returning 30% of operating cash flow to shareholders, which keeps dividend growth modest but ties excess cash toward repurchases and a variable dividend each year.
Review ConocoPhillips’ dividend history.
Medtronic
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 3.31%
- Industry: Medical Devices
Medtronic stock trades 25% 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 equity analyst Debbie Wang explains. The company aims to return a minimum of 50% of its annual free cash flow to shareholders but has been in the 60% to 70% range in recent years, says Wang. Medtronic has raised its dividend for 46 consecutive years, earning it dividend aristocrat status.
Review Medtronic’s dividend history.
Dow
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 6.67%
- Industry: Chemicals
Dow is the most undervalued stock on our list of the best dividend stocks to buy, trading 40% below our $70 fair value estimate. 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. Recent results were weighed down by the firm’s industrial intermediates and infrastructure segment because of soft construction activity, explains Morningstar strategist Seth Goldstein. The company has paid dividends of $2.80 per share in the past three years, which we expect it will maintain moving forward.
Review Dow’s dividend history.
LyondellBasell
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 6.90%
- Industry: Specialty Chemicals
LyondellBasell is the highest-yielding stock on our list of the best dividend stocks to buy; shares trade 34% beneath our $115 fair value estimate. This petrochemical producer is the world’s largest producer of polypropylene. We think the company has carved out a narrow economic moat based on its cost advantages, explains Morningstar’s Goldstein. The company has increased its annual dividend payment for the past 12 years straight, averaging about 12.5% growth per year since 2012. “Management prioritizes dividend growth as a part of its capital allocation strategy,” adds Goldstein.
Review LyondellBasell Industries’ dividend history.
General Mills
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Low
- Trailing Dividend Yield: 3.66%
- Industry: Packaged Foods
General Mills rounds out our list of the best dividend stocks to buy. With a portfolio of brands that includes Nature Value, Cheerios, Yoplait, and Pillsbury, among others, we think the firm has carved out a narrow economic moat. Slowing consumer spending has hurt recent results and will likely continue to do so into 2025, but we expect General Mills’ brands to deliver in the long run, argues Morningstar strategist Kris Inton. The company has paid a consistent dividend for decades and has only paused increases when addressing postacquisition leverage, explains Inton. We think this dividend stock is worth $74, and shares trade 12% below that.
Review General Mills' dividend history.
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 Rating and Morningstar Uncertainty Rating. 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 US 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.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
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