10 Cheap Stocks With Safe Dividends – Morningstar

These stocks in the Morningstar Dividend Yield Focus Index look undervalued today.
Dividend stock investors have enjoyed a pleasant surprise in 2022: Although many expected stable dividend stocks to slump as interest rates rose and bond yields became more attractive, dividend stocks have remained remarkably resilient. The Morningstar Dividend Yield Focus Index, which is a collection of quality stocks with durable dividends, is up nearly 8% this year, while the Morningstar US Market Index, which represents the broader market, is down more than 16%.
Of course, energy stocks, which tend to offer high and stable dividends, are outperforming everything else in 2022, which has buoyed the relative performance of dividend stocks as a group.
But that’s only part of the story. Dividend stocks have held up far better than growth stocks—some of which pay no dividends—this year. In a new report called Why Haven’t Rising Interest Rates Sunk Dividend-Paying Stocks?, Morningstar Indexes strategist Dan Lefkovitz and analyst Saumya Gattani argue that the link between dividend payers and interest rates has, in fact, been unclear over time. “There have been plenty of periods like 2004-2006, when rates rose but dividend stocks dramatically outperformed growth stocks,” they say.
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.
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 most heavily weighted constituents, and they’re also cheap, trading well below our fair value estimates as of Dec. 5, 2022.
Here’s a little bit about each stock along with some key Morningstar metrics about each. All data is through Dec. 5.
Verizon is clearly a cheap stock, trading a whopping 37% below our fair value estimate of $59. We think the market is overly focused on Verizon’s challenges to add postpaid consumer wireless customers, says Morningstar director Mike Hodel. Hodel notes that Verizon’s price increase earlier this year is important for the long-term health of the narrow-moat company. This dividend stock offers the highest forward yield on our list; Hodel observes that 50% to 60% of Verizon’s free cash flow is committed to the dividend.
Broadcom stock looks cheap, trading 15% below our $624 fair value estimate. Morningstar sector strategist Abhinav Davuluri says Broadcom is among “the heavyweight class of technology leaders,” thanks to the quality of its products that go into several different end markets, including high-end smartphones. Davuluri applauds the company’s skill at purchasing companies with best-of-breed products at attractive valuations and driving cost synergies; it plans to close its acquisition of VMware in late 2023.
We think Cisco stock is worth $54 per share; shares currently trade about 9% 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.
3M is a cheap stock by our measures, as shares trade 32% below our $183 fair value estimate. Known for its research and development laboratory, 3M leverages its science and technology across multiple product categories, says Morningstar senior analyst Josh Aguilar. The company has a strong shareholder orientation, he adds, with a payout ratio that typically ranges between 50% and 60%, which is at the high end when compared with the payout ratios of its multi-industrials peers.
Blackstone stock trades 29% 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 have 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.
Medtronic stock trades significantly 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.
Truist stock is undervalued, with shares trading about 29% below our fair value estimate of $60. The result of a merger between BB&T and SunTrust, Truist boasts some of the best scale among the U.S. regional banks and a uniquely complete platform across retail, commercial, advisory, wealth, and insurance, says Morningstar strategist Eric Compton. Like most banks, Truist returns more capital through shares repurchases than dividends, which is sensible for companies whose earnings can be volatile, he concludes.
PNC stock currently trades 15% below our $180 fair value estimate. PNC (which is now the second-largest regional bank in the U.S.) has succeeded at expanding its customer base both in commercial banking and in retail and has made transformational banking-related acquisitions, says Compton. Compton adds that PNC is one of the better operators we cover. As with Truist, we think PNC’s capital allocation strategy is sound, as it too returns more capital through share repurchases than through dividends.
Dominion Energy stock is significantly undervalued, trading 24% below our $78 fair value estimate. Dominion has sold off assets to streamline itself into a regulated utility. About 90% of earnings will come from regulated electric and gas utilities with constructive state regulation in Virginia, Utah, Ohio, and the Carolinas, estimates Morningstar senior analyst Andrew Bischof. He thinks Dominion’s 65% dividend payout ratio is appropriate, given its regulated assets. In November, management unexpectedly announced a strategic review of the company’s current business mix and capital allocation, adding some uncertainty, concludes Bischof.
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 may choose to end the company’s offshore wind investment, which would free up future capital for onshore infrastructure investment, says Miller.
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 Uncertainty ratings. 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.
Investors who would like to find more undervalued stocks with stable dividends can do the following:
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This article was previously updated on Nov. 8, 2022.
Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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