Dividend stocks can offer a safe haven in times of market volatility, with the potential for steady or rising income and capital gains.
But not every dividend stock is one you should buy, even among companies that regularly lift their dividends. Morningstar has chosen one dividend stock it recommends purchasing and another that it recommends shunning.
The Buy
Kellanova (K) -)
Morningstar moat (durable competitive advantage) rating: narrow. Morningstar fair value estimate: $75. Friday price quote: $53.35. Forward dividend yield: 4.23%.
Kellanova is the global snacking arm of the former Kellogg business, including such brands as Pringles potato chips.
“It’s a leading packaged food manufacturer across many on-trend categories,” wrote Morningstar analyst Erin Lash.
“The stock is languishing in the face of worries about a falloff in consumer spending that we think are short-sighted. We expect this more-focused company will be able to unlock profitable growth.”
The company does face headwinds, such as cost pressures, she says. But “we’re encouraged that Kellanova doesn’t intend to tap the brakes on investments in innovation, brand-building and capacity,” she said.
“We see these investments as supportive of its brand standing and its entrenched retail relationships.” The company will also benefit from sales growth in emerging markets, Lash said.
The Stock to Avoid
IBM (IBM) -), the information technology giant.
Morningstar moat rating: narrow. Morningstar fair value estimate: $126. Friday price quote: $154.45. Forward dividend yield: 4.28%. The company has increased its dividend for 28 straight years.
“IBM remains a giant in the IT services industry for now, but the migration of business to the cloud and the availability of open-source software threaten its position,” wrote Morningstar analyst Julie Bhusal Sharma. “IBM’s narrow moat is deteriorating.”
As for its business lines, “IBM is the dominant provider of mainframes and a prominent player in the public cloud, data management systems, and other software products,” Sharma said.
But “while the company has tried to refresh its diverse offerings, the cloud transition is chipping away at its competitive advantage,” she said.
“Historically, customers tended to entrench themselves with IBM offerings because of the ease of having a main IT services provider and the surety of IT functions having interoperability. However, with the rise of the cloud and open-source software, the possibility of mix-and-match IT infrastructure is real.”
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