Dividend Stocks To Buy For An Income Stream
In the unpredictable world of investing, where economic uncertainty and market volatility loom large, seasoned investors recognize the value of dividends from quality, undervalued stocks. We believe that the key to success lies not just in the highest yields but in identifying stocks with durable dividends. Steering away from mere yield, we advocate for a strategic approach, emphasizing companies with supportive management, competitive advantages, and economic moats. In our quest for the best dividend stocks, we turn to the Morningstar Dividend Yield Focus Index, revealing the top 10 stocks that are not only high-yielding but also undervalued, presenting a promising investment opportunity for smart investors.
1. **Exxon Mobil (XOM)**
— Morningstar Rating: 4 stars
— Economic Moat Rating: Narrow
— Uncertainty Rating: High
— Trailing Dividend Yield: 3.68%
— Industry: Oil and Gas Integrated
*Investment Thesis:* Exxon Mobil leads our list with a strategic acquisition plan and recent cost-cutting measures that position the company for dividend stability. Despite challenges in 2020, the firm’s commitment to meeting dividend payments and a recent 4% dividend increase make it an attractive investment. Trading at a 20% discount to our estimated value of $123, Exxon Mobil offers potential upside.
2. **Verizon Communications (VZ)**
— Morningstar Rating: 4 stars
— Economic Moat Rating: Narrow
— Uncertainty Rating: Medium
— Trailing Dividend Yield: 6.83%
— Industry: Telecom Services
*Investment Thesis:* Verizon, trading 28% below our fair value estimate of $54, presents an opportunity amid concerns about postpaid consumer wireless growth. A balanced wireless industry and strong free cash flow generation make Verizon a compelling choice, with a dividend payout representing 65% of 2023’s estimated cash flow.
3. **PepsiCo (PEP)**
— Morningstar Rating: 4 stars
— Economic Moat Rating: Wide
— Uncertainty Rating: Low
— Trailing Dividend Yield: 2.96%
— Industry: Beverages — Nonalcoholic
*Investment Thesis:* A dividend aristocrat, PepsiCo boasts innovation, a flexible channel strategy, and efficiency gains. Trading below our estimated value of $180, PepsiCo has raised its dividend for 51 consecutive years, and we anticipate 8% annual dividend growth over the next decade.
4. **Altria Group (MO)**
— Morningstar Rating: 4 stars
— Economic Moat Rating: Wide
— Uncertainty Rating: Medium
— Trailing Dividend Yield: 9.29%
— Industry: Tobacco
*Investment Thesis:* Altria, the highest-yielding stock on our list, trades 21% below our fair value estimate of $52. Its focus on cigarette substitutes and consistent pricing power positions the company for revenue, earnings, and dividend growth, with dividends being a top capital-allocation priority.
5. **Wells Fargo (WFC)**
— Morningstar Rating: 4 stars
— Economic Moat Rating: Wide
— Uncertainty Rating: Medium
— Trailing Dividend Yield: 2.74%
— Industry: Banks — Diversified
*Investment Thesis:* The sole bank on our list, Wells Fargo, trades 11% below our $55 fair value estimate. Despite a lower-than-expected net interest income forecast for 2024, the bank’s sound balance sheet and expected return to a dividend payout ratio of roughly 30% make it an intriguing choice.
6. **Comcast (CMCSA)**
— Morningstar Rating: 4 stars
— Economic Moat Rating: Wide
— Uncertainty Rating: Medium
— Trailing Dividend Yield: 2.70%
— Industry: Telecom Services
Investment Thesis:* Trading 28% below our $60 fair value estimate, Comcast faced challenges in the third quarter. However, its potential to limit broadband share losses and robust pricing power, combined with a history of increasing payouts, positions it as a strong investment with a sound balance sheet.
7. **Bristol-Myers Squibb (BMY)**
— Morningstar Rating: 4 stars
— Economic Moat Rating: Wide
— Uncertainty Rating: Medium
— Trailing Dividend Yield: 4.59%
— Industry: Drug Manufacturers — General
*Investment Thesis:* Trading 20% below our fair value estimate of $63, Bristol-Myers Squibb stands out among undervalued dividend stocks. A robust drug portfolio, adept acquisitions, and a wide moat rating make it an attractive choice. The 30% payout ratio aligns with upcoming patent losses, indicating a balanced dividend approach.
8. **Gilead Sciences (GILD)**
— Morningstar Rating: 4 stars
— Economic Moat Rating: Wide
— Uncertainty Rating: Medium
— Trailing Dividend Yield: 3.47%
— Industry: Drug Manufacturers — General
*Investment Thesis:* Gilead Sciences, trading 13% below our fair value estimate of $97, showcases strong profit margins in its HIV and HCV portfolio. A reasonable 50% payout ratio, along with a history of dividend increases, positions Gilead as a sound investment in the pharmaceutical sector.
9. **Medtronic (MDT)**
— Morningstar Rating: 4 stars
— Economic Moat Rating: Wide
— Uncertainty Rating: Medium
— Trailing Dividend Yield: 3.15%
— Industry: Medical Devices
*Investment Thesis:* Medtronic, trading 22% below our $112 fair value estimate, is a leading medical-device maker with a diversified product portfolio. Plans to spin off certain businesses align with a pivot toward faster-growing markets. With 46 consecutive years of dividend increases, Medtronic offers stability and growth potential.
10. **NextEra Energy (NEE)**
— Morningstar Rating: 4 stars
— Economic Moat Rating: Wide
— Uncertainty Rating: Narrow
— Trailing Dividend Yield: 3.06%
— Industry: Utilities — Regulated Electric
*Investment Thesis:* As a dividend aristocrat, NextEra Energy combines a narrow-moat regulated utility with a fast-growing renewable energy business. Trading 16% below our $74 fair value estimate, it provides investors with a secure dividend and growth potential, expecting 10% annual dividend increases through 2027.
11. **Medtronic (MDT)**
— Morningstar Rating: 4 stars
— Economic Moat Rating: Wide
— Uncertainty Rating: Medium
— Trailing Dividend Yield: 3.15%
— Industry: Medical Devices
*Investment Thesis:* Medtronic, trading 22% below our $112 fair value estimate, is a leading medical-device maker with a diversified product portfolio. Plans to spin off certain businesses align with a pivot toward faster-growing markets. With 46 consecutive years of dividend increases, Medtronic offers stability and growth potential.
12. **NextEra Energy (NEE)**
— Morningstar Rating: 4 stars
— Economic Moat Rating: Wide
— Uncertainty Rating: Narrow
— Trailing Dividend Yield: 3.06%
— Industry: Utilities — Regulated Electric
*Investment Thesis:* As a dividend aristocrat, NextEra Energy combines a narrow-moat regulated utility with a fast-growing renewable energy business. Trading 16% below our $74 fair value estimate, it provides investors with a secure dividend and growth potential, expecting 10% annual dividend increases through 2027..
These 12 stocks, carefully selected from the Morningstar Dividend Yield Focus Index, present an opportunity for investors seeking undervalued assets with durable dividends. By focusing on quality, economic moats, and management strategies, these stocks offer a blend of stability, growth potential, and attractive yields in a market marked by uncertainty and volatility. As always, investors are encouraged to conduct their own research and consider their risk tolerance before making investment decisions.
