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July 12, 2023 at 02:28 PM
The overall market is looking good after a strong second quarter, but dividend stocks are continuing to have a rough time, Morningstar investment analyst Susan Dziubinski writes in a new blog post.
Dziubinski explains that the types of stocks that pay dividends are struggling — most notably financial services, energy and health care stocks that land in the value category. As a result, the Morningstar Dividend Yield Focus Index, a collection of quality stocks with stable dividends, is underperforming the broad-based Morningstar US Market Index.
Stocks in the value category are “still about 15% undervalued,” says Morningstar senior market strategist David Sekera, adding that there are “a lot of high dividend-paying stocks within value that we see as really being 4- and 5-star-rated.”
High-Dividend vs. Dividend Growth Stocks
Dziubinski writes that investors who are researching dividend stock mutual funds and ETFs should be sure to understand the fund’s approach.
One group of funds invests in high-dividend stocks, which are typically from more mature businesses that choose to pay out profits rather than reinvest them. Investors will often find these companies in the financials, energy, utilities and industrials sectors.
Dziubinski notes that although their yields are alluring, high-dividend stocks carry some risk, especially those in economically sensitive sectors that may be vulnerable during an economic slowdown. High-yielding stocks can also face interest-rate risk; when rates trend up, investors may swap high-income-producing stocks for bonds.
The second group, dividend-growth stocks, usually do not boast robust yields as high-dividend stocks do, but they most often come from companies that are financially healthy and have raised their dividends over time. As such, dividend-growth stocks generally exhibit some resilience during market downturns and economic slowdowns.
See the gallery for 15 mutual funds and ETFs that focus on U.S. dividend stocks and have at least one share class that earns top Morningstar Medalist Ratings of Gold or Silver as of July 7. Year-to-date performance is as of July 11.
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