It’s a dividend stock investor’s worst nightmare: That dividend that he or she has been relying on gets cut.
Dividend investors who own Hanesbrands HBI stock know how that feels: After a tough 2022, management decided to prioritize debt reduction and, as a result, entirely eliminated the company’s quarterly dividend in February 2023.
“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 really screen for dividend durability, reliability going forward.”
How to Find Stocks with Safe Dividends
What metrics should investors pay attention to when seeking stocks with durable dividends? David Harrell, editor of Morningstar DividendInvestor, suggests focusing on companies with management teams that are supportive of their dividend strategies. He also says to examine a company’s payout ratio and favor 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,” says Harrell.
Lefkovitz argues that “distance to default” is another useful health-screening tool for dividend payers.
“Distance to default is a measure of balance sheet strength. It gauges the likelihood of bankruptcy. It looks at leverage and volatility and gauges whether the sum of a firm’s assets are at risk of falling below its liabilities. We found that the wider the economic moat and the better the distance to default score, the less likely for a firm to cut its dividend,” he says.
Given ongoing economic uncertainty and market volatility, investors might consider adding cheap, quality dividend stocks to their portfolios. 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 for less than what they’re worth.
10 Cheap Stocks to Buy With Stable Dividends
To find undervalued stocks with safe dividends, we turn to the Morningstar Dividend Yield Focus Index. The dividend stocks on this list are among the index’s constituents, and they’re also cheap, trading well below our fair value estimates as of Feb 10, 2023.
1) Verizon Communications VZ
2) Cisco Systems CSCO
3) Comcast CMCSA
4) Medtronic MDT
5) Gilead Sciences GILD
6) Blackstone BX
7) Public Service Enterprise PEG
8) International Flavors & Fragrances IFF
9) Kellogg K
10) Garmin GRMN
Here’s a little bit about each stock along with some key Morningstar metrics about each. All data is through Feb. 10, 2023.
Verizon Communications
- Morningstar Rating: 5 stars
- Economic Moat Rating: Narrow
- Forward Dividend Yield %: 6.52
- Industry: Telecom Services
Verizon is clearly a cheap dividend stock, trading a whopping 30% below our fair value estimate of $57. We think the market is overly focused on Verizon’s challenges to add postpaid consumer wireless customers, says Morningstar director Mike Hodel. Hodel expects margins and cash flow to move higher as network projects are completed and the promotional environment eases. This dividend stock offers the highest forward yield on our list; Hodel observes that 50%-60% of Verizon’s free cash flow is committed to the dividend.
Cisco Systems
- Morningstar Rating: 4 stars
- Economic Moat Rating: Wide
- Forward Dividend Yield %: 3.22
- Industry: Communication Equipment
We think Cisco stock is worth $54 per share; shares currently trade about 12% below that. The dominant force in enterprise networking, Cisco maintains leading market shares across switching, routing, and wireless access, observes Morningstar analyst William Kerwin. Given our confidence in Cisco’s leadership, we recently upgraded our Morningstar Economic Moat Rating on the company to wide from narrow. Kerwin calls the company’s shareholder returns program “excellent,” and the company maintains a growing dividend at a high payout ratio.
Comcast
- Morningstar Rating: 5 stars
- Economic Moat Rating: Wide
- Forward Dividend Yield %: 3.02
- Industry: Telecom Services
Comcast is a cheap stock by our measures, as shares trade 36% below our $60 fair value estimate. While broadband customer growth is anemic and NBC Universal is challenged, we think Comcast is well positioned to limit broadband share losses and enjoy solid pricing power, says Hodel. Comcast instituted a dividend in 2008 and has increased its payout 17% annually, on average, notes Hodel—and we think the balance sheet is sound and shareholder returns are generally appropriate.
Medtronic
- Morningstar Rating: 4 stars
- Economic Moat Rating: Wide
- Forward Dividend Yield %: 3.25
- Industry: Medical Devices
Medtronic stock trades 25% 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, explains Morningstar senior analyst Debbie Wang. The company’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. Medtronic has raised its dividend for 45 consecutive years.
Gilead Sciences
- Morningstar Rating: 4 stars
- Economic Moat Rating: Wide
- Forward Dividend Yield %: 3.46
- Industry: Drug Manufacturers—General
Gilead stock is undervalued, with shares trading about 11% below our fair value estimate of $97. The company generates outstanding profit margins with its HIV and HCV portfolio, and its portfolio and pipeline support a wide economic moat, says Morningstar strategist Karen Andersen. The company has steadily increased its dividend over time, with a payout ratio around 50%, which Andersen calls “reasonable.”
Blackstone
- Morningstar Rating: 4 stars
- Economic Moat Rating: Narrow
- Forward Dividend Yield %: 4.72
- Industry: Asset Management
Blackstone stock trades 19% below our fair value estimate of $115. One of the world’s largest alternative asset managers, Blackstone has built a team with decades of industry experience revitalizing companies through cost-cutting, acquisitions, or other strategic initiatives, says Morningstar strategist Greggory Warren. Diversification and solid fundraising helped the firm weather the downturn in the equity and credit markets, he adds. We expect the firm to continue to favor dividend payouts versus share repurchases.
Public Service Enterprise Group
- Morningstar Rating: 4 stars
- Economic Moat Rating: Narrow
- Forward Dividend Yield %: 3.56
- Industry: Utilities—Regulated Electric
Public Service Enterprise Group stock currently trades 7% below our $65 fair value estimate. The company has transitioned to a predominantly regulated transmission and distribution utility, explains Morningstar strategist Travis Miller, with the company’s regulated distribution and transmission utility in New Jersey expected to contribute 90% of consolidated earnings. He adds that the company’s dividend and stock repurchase strategies are sound. New CEO Ralph LaRossa is selling the company’s offshore wind investment, which should free up future capital for onshore infrastructure investment, says Miller.
International Flavors & Fragrances
- Morningstar Rating: 5 stars
- Economic Moat Rating: Wide
- Forward Dividend Yield %: 3.42
- Industry: Specialty Chemicals
International Flavors & Fragrances stock currently trades 32% below our $140 fair value estimate. While we expect strong long-term growth for the largest specialty ingredients producer, we think 2023 will be rough as cost inflation and an economic slowdown will lead to lower volumes, says Morningstar strategist Seth Goldstein. That being said, we view the company’s balance sheet as sound and its dividend appropriate.
Kellogg
- Morningstar Rating: 4 stars
- Economic Moat Rating: Wide
- Forward Dividend Yield %: 3.49
- Industry: Packaged Foods
Kellogg stock is undervalued, trading 17% below our $82 fair value estimate. Kellogg plans to spin off its North American cereal and plant-based alternative businesses, which may allow the firm to unlock a higher multiple for its faster-growing snack business, argues Morningstar director Erin Lash. Kellogg has shrewdly reorganized its North America operations to leverage its scale and more effectively allocate resources toward its highest-returning opportunities, she adds. We expect Kellogg to increase its dividend at a mid-single-digit pace annually, with the payout ratio hovering around 50% on average.
Garmin
- Morningstar Rating: 4 stars
- Economic Moat Rating: Narrow
- Forward Dividend Yield %: 3.04
- Industry: Scientific & Technical Instruments
Garmin stock looks undervalued by our measures, as shares trade 31% below our $140 fair value estimate. Garmin specializes in GPS-enabled hardware and software for recreational and defense needs and has carved out a narrow moat thanks in part to switching costs, notes Morningstar analyst Julie Bhusal Sharma. The company’s balance sheet is sound, with a healthy cash cushion and a lack of debt. Garmin’s dividend has increased at a compound annual growth rate of 48% during the past three years, she adds.
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 and Uncertaintyratings. 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.
How to Find More Cheap, Safe Dividend Stocks
Investors who would like to find more undervalued stocks with stable dividends 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 new Morningstar Investor Screener tool to find dividend stocks that meet your specific definition of “undervalued.” You can search for stocks based on their dividend yields, valuation measures such as price/earnings, and more.
- Build a watchlist of dividend stocks in Morningstar Investor 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 new dividend-stock ideas to consider.
- https://www.morningstar.com/stocks/10-cheap-stocks-with-safe-dividends
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