Dividend stocks often offer a safe haven in times of market volatility. They can provide regular and rising payouts as well as capital gains.
So how should you choose among dividend stocks? “At Morningstar, we think that the best dividend stocks aren't simply the highest dividend stocks,” Morningstar investment specialist Susan Dziubinski wrote in a commentary.
“Instead, we suggest investors look beyond a stock's yield, choose stocks with durable dividends, and buy those stocks when they're undervalued.”
Dan Lefkovitz, a strategist for Morningstar Indexes, elaborated on that point. "It's really critical to be selective when it comes to buying dividend-paying stocks and chasing yield," he said.
"Looking for the most yield-rich areas of the market can often lead you into troubled areas and dividend traps. Those are companies that have a nice-looking yield that is ultimately unsustainable. You have to screen for dividend durability."
The advantage of moats, or durable advantages
David Harrell, editor of the Morningstar DividendInvestor newsletter, advises looking at companies with competitive advantages, what the firm calls economic moats.
Selecting a company that Morningstar assigns a moat “does not guarantee dividends, of course,” he said. “But we have seen some very strong correlations between economic moats and dividend durability.”
The bottom line: “Given ongoing economic uncertainty and stock market volatility, investors looking for dividend stocks today might consider undervalued, quality stocks.” Dziubinski said..
“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.”
Morningstar put together a list of the “10 best dividend stocks today.” They are drawn from the Morningstar Dividend Yield Focus Index and are substantially undervalued compared to Morningstar’s fair value estimates.
The List
1. Verizon Communications (VZ) -)
Morningstar moat: narrow. Fair-value estimate: $54. Monday price quote: $32.85. Forward dividend yield: 7.09%
2. Pfizer (PFE) -)
Morningstar moat: wide. Fair-value estimate: $48. Monday price quote: $37. Forward dividend yield: 4.52%
3.Comcast (CMCSA) -)
Morningstar moat: wide. Fair-value estimate: $60. Monday price quote: $45.70. Forward dividend yield: 2.78%.
4. Wells Fargo (WFC) -)
Morningstar moat: wide. Fair-value estimate: $61. Monday price quote: $42.35. Forward dividend yield: 2.95%.
5. Medtronic (MDT) -)
Morningstar moat: wide. Fair-value estimate: $112. Monday price quote: $81.30. Forward dividend yield: 3.20%.
6. Gilead Sciences (GILD) -)
Morningstar moat: wide. Fair-value estimate: $97. Monday price quote: $75.60. Forward dividend yield: 3.94%.
7. Dow (DOW) -)
Morningstar moat: narrow. Fair-value estimate: $72. Monday price quote: $54.20. Forward dividend yield: 5.29%.
8. WEC Energy (WEC) -)
Morningstar moat: narrow. Fair-value estimate: $96. Monday price quote: $84.75. Forward dividend yield: 3.57%.
9. DTE Energy (DTE) -)
Morningstar moat: narrow. Fair-value estimate: $116. Monday price quote: $104.35. Forward dividend yield: 3.50%.
10. PPL Corp. (PPL) -)
Morningstar moat: narrow. Fair-value estimate: $29. Monday price quote: $24.90. Forward dividend yield: 3.66%.
The author of this story owns shares of Verizon, Pfizer, Comcast and Medtronic.
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