Dividend stocks can offer safety in times of market turmoil. They can provide regular – sometimes rising – income and the potential for capital gains.
Morningstar outlined its philosophy toward dividend stocks in its monthly report on the 10 best of them.
Related: Morningstar's 5 stocks to buy if interest rates stay higher for longer
“The best dividend stocks aren’t simply the highest-yielding dividend stocks,” the report says. “We suggest investors look beyond a stock’s yield and instead choose stocks with durable dividends and buy those stocks when they’re undervalued.”
So, “it’s really critical to be selective when it comes to buying dividend-paying stocks and chasing yield,” said Morningstar strategist Dan Lefkovitz.
“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.”
And, of course, you want companies with strong management teams and competitive advantages.
Here’s Morningstar’s top 10 list. All the stocks earned wide moat ratings from the firm. That means its analysts think the companies have competitive advantages that will last at least 20 years. All of the stocks are also trading below Morningstar’s fair value estimates.
Telecommunications, Beverages, Tobacco
1. Verizon Communications (VZ) -)
Morningstar fair value estimate: $54. Wednesday price quote: $31.10.
“Verizon is primarily focused on the wireless business, where it has taken steps to ensure it remains well positioned,” wrote Morningstar analyst Michael Hodel.
He lauded the company’s network quality. “We believe it will deliver consistent results, but growth will likely be very modest.”
2. Coca-Cola (KO) -)
Morningstar fair value estimate: $60. Wednesday price quote: $54.20.
Coke benefits from an “impressive brand portfolio, pricing power, close retailer relations and scale benefits stemming from a massive global system,” wrote Morningstar analyst Dan Su.
That “reinforces its competitive position in the non-alcoholic beverage market and drives excess investment returns.”
3. PepsiCo (PEP) -)
Morningstar fair value estimate: $180. Wednesday price quote: $162.40.
“Following years of anemic growth due to operational missteps and under-investment, management has worked to right PepsiCo’s ship, even amid covid disruptions and inflation,” Su wrote.
And the company can make more progress, helped by secular tailwinds in the snack business among other factors, she said.
4. Altria Group (MO) -)
Morningstar fair value estimate: $52. Wednesday price quote: $43.25.
5. Wells Fargo (WFC) -)
Morningstar fair value estimate: $61. Wednesday price quote: $41.50.
Entertainment, Drugs, Delivery Service
6. Comcast (CMCSA) -)
Morningstar fair value estimate: $60. Wednesday price quote: $44.15.
7. Bristol-Myers Squibb (BMY) -)
Morningstar fair value estimate: $66. Wednesday price quote: $57.
8. United Parcel Service (UPS) -)
Morningstar fair value estimate: $172. Wednesday price quote: $155.05.
9. Gilead Sciences (GILD) -)
Morningstar fair value estimate: $97. Wednesday price quote: $79.80.
10. Medtronic (MDT) -)
Morningstar fair value estimate: $112. Wednesday price quote: $73.
The author of this story owns shares of Verizon, Coke, Pepsi, Comcast, UPS and Medtronic.
