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 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 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 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.
- Verizon Communications VZ
- Johnson & Johnson JNJ
- Coca-Cola KO
- PepsiCo PEP
- Altria Group MO
- Wells Fargo WFC
- Comcast CMCSA
- Bristol-Myers Squibb BMY
- United Parcel Service UPS
- Gilead Sciences GILD
Here’s a little bit about each cheap dividend stock, along with some key Morningstar metrics. All data is through Nov. 14, 2023.
Verizon Communications
- Morningstar Rating: 5 stars
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 7.31%
- Industry: Telecom Services
Verizon tops our list of the best dividend stocks to buy. This cheap dividend stock, which is also the second-largest holding in the Morningstar Dividend Yield Focus Index, is trading a whopping 33% below our fair value estimate of US$54 per share. We think the market is overly focused on Verizon’s challenges to add postpaid consumer wireless customers, says Morningstar director Mike Hodel. Hodel argues that the improving competitive balance in the wireless industry will allow the major U.S. carriers to boost profitability in the years ahead. Verizon’s third-quarter earnings illustrated that modest customer growth hasn’t slowed free cash flow generation. Hodel observes that Verizon’s distributions are on the high side, with 65% of 2023′s estimated cash flow being directed to the dividend. But he expects the firm to hold off on share buybacks for now, given the focus on the dividend.
Johnson & Johnson
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Low
- Trailing Dividend Yield: 3.14%
- Industry: Drug Manufacturers—General
Johnson & Johnson is the first dividend aristocrat on our list of cheap dividend stocks; dividend aristocrats are companies that have raised their dividends for at least 25 consecutive years. The stock is trading about 9% below our fair value estimate of US$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 Damien Conover. Johnson & Johnson reported solid third-quarter results, and Conover notes that the market is underestimating the company’s solid pipeline. Conover calls Johnson & Johnson’s dividends (and share repurchases) “about right.”
Coca-Cola
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Low
- Trailing Dividend Yield: 3.19%
- Industry: Beverages—Non-Alcoholic
Coca-Cola is the second dividend aristocrat 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. Third-quarter earnings came in better than expected. We remain positive on the company’s focus on a total beverage portfolio, says Su, and view its push into nonsparkling categories as a good thing for healthy top-line growth. We expect dividend payments to increase 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 US$60.
PepsiCo
- Morningstar Rating: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Low
- Trailing Dividend Yield: 2.87%
- Industry: Beverages—Non-Alcoholic
Coca-Cola rival Pepsi is the third dividend aristocrat on this month’s list of the best dividend stocks to buy. Pepsi notched good results in the most recent quarter thanks to snack and beverage innovations, its flexible channel strategy, and efficiency gains, notes Morningstar’s Su. We think Pepsi stock is worth US$180, and shares trade below that. Pepsi has raised its dividend for 51 consecutive years, and we expect dividend payments to increase 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: 9.45%
- Industry: Tobacco
This month’s highest-yielding stock on our list of the best dividend stocks to buy, Altria is trading 22% below our fair value estimate of US$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: 4 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 3.09%
- Industry: Banks—Diversified
Wells Fargo is the only bank on our list of cheap dividend stocks, trading 22% below our US$55 fair value estimate. Third-quarter earnings were similar to the previous quarter’s, with both the expense outlook and net interest income rising, notes Morningstar director Eric Compton. Compton says that Wells Fargo’s balance sheet is sound 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: 5 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
- Trailing Dividend Yield: 2.72%
- Industry: Telecom Services
Comcast stock trades 29% below our US$60 fair value estimate. The company’s third-quarter results disappointed, with the stock selling off after posting customer losses that were deeper than one year prior. We nevertheless 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 16% 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: 4.51%
- Industry: Drug Manufacturers—General
The second of three drugmaker stocks on our list of undervalued dividend stocks to buy, Bristol-Myers Squibb trades 18% below our fair value estimate of US$63. The company has built a strong portfolio of drugs and a robust pipeline through adept acquisitions, explains Morningstar’s Conover. Its lineup of patent-protected drugs, entrenched salesforce, and economies of scale underpin its wide moat rating. While the firm’s 30% payout ratio rests below the industry average of 50%, we think the level is 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: 4.53%
- Industry: Integrated Freight and Logistics
The world’s largest parcel delivery company is the only stock from the industrials sector on our list of the best dividend stocks to buy. We assign UPS stock a US$164 fair value estimate, and shares trade about 10% below that. Third-quarter results came in below our expectations, particularly on the margin front, notes Morningstar senior analyst Matthew Young. Yet, favorable e-commerce trends should remain a longer-term top-line tailwind, he adds. UPS’ 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: 3.99%
- Industry: Drug Manufacturers—General
Gilead rounds out our list of the best dividend stocks to buy. The company generates outstanding profit margins with its HIV and HCV portfolio, and its portfolio and pipeline support a wide moat rating, says Morningstar strategist Karen Andersen. Third-quarter results came in strong. The company has steadily increased its dividend over time; its payout ratio hovers around 50%, which Andersen calls “reasonable.”
