Dividend-growth stocks, companies with a history of steady dividend increases, have lagged the broader market this year, Morningstar investment specialist Susan Dziubinski wrote in a blog post this week.
The Morningstar US Dividend Growth Index, which includes securities that pay qualified dividends and have increased their dividend payments over the past five years, underperformed the Morningstar US Market Index by more than 2 full percentage points through Sept. 19.
Dan Lefkovitz, a strategist with Morningstar Indexes, attributes dividend-growth stocks’ underperformance to the revival in risk-on assets in late spring.
“Dividend-payers may lag during market environments led by hot growth stocks, but in down periods like 2022 and 2018, they show resilience,” Lefkovitz said.
Dividend-growth stocks have three things going for them, according to Dziubinski. For one, companies with growing dividends tend to be profitable and financially healthy, valuable qualities during periods of economic slowdown.
For another, companies that have increased dividends over time are also more likely to have competitive advantages that may allow them to pass along price increases and thereby maintain margins during inflationary times.
And dividend-growth stocks tend to be less volatile than the overall stock market and so are attractive investments for playing a little defense.
Morningstar analysts dipped into the dividend-growth index to uncover companies that are significantly undervalued at present. The stocks they selected all have steadily increased their dividends over the past five years, pay out no more than 75% of their earnings in the form of dividends, have competitive advantages (as measured by the Morningstar Economic Moat Rating) and were trading at among the largest discounts to analysts’ fair value estimates as of Sept. 19.
See the accompanying gallery for the 10 cheap dividend-growth stocks to buy now. Year-to-date performance is as of Sept. 25.
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