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April 13, 2023 at 11:28 AM
When choosing the best dividend stocks, Morningstar suggests that investors look beyond a stock’s yield and opt for stocks with durable dividends, buying them when they are undervalued, equity strategist Susan Dziubinski writes in a blog post released Wednesday.
“It’s really critical to be selective when it comes to buying dividend-paying stocks and chasing yield,” Dziubinski’s colleague Dan Lefkovitz says in the post. “Looking for the past yield-rich areas of the market can often lead you into troubles areas and dividend traps — companies that have a nice-looking yield that is ultimately unsustainable.”
David Harrell, editor of Morningstar DividendInvestor, says investors might focus on companies with management teams that support their dividend strategies and favor those 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 continuing economic uncertainty and stock market volatility, investors who want the best dividend stock today might consider adding undervalued, quality dividend stocks to their portfolios, Dziubinski writes.
“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 for less than what they’re worth.”
Top Dividend Stocks
To find the best dividend stocks, Morningstar looked to the firm’s Dividend Yield Focus Index, a subset of the Morningstar U.S. Market Index, which represents 97% of equity market capitalization. The index tracks the top 75 high-yielding stocks that meet analysts’ screening requirements for quality and financial health.
Only securities whose dividends are qualified income are included in the index; real estate investment trusts are removed. 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 taps 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.
See the gallery for 10 dividend stocks from among the index’s constituents that are also trading below Morningstar’s fair value estimates.
(Image: Shutterstock)
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