10 extremely undervalued dividend stocks to buy: Morningstar analysts

  • Dividend stocks have held up much better than growth stocks this year, according to Morningstar.
  • The company’s Dividend Yield Focus Index is up 4%, while the overall US market index is down 20%.
  • The company shares 10 “undervalued” stocks, all of which have a dividend yield of 3.2% or more.

Last week, the S&P 500 and Nasdaq Composite saw their biggest one-day rallies since 2020 after consumer price data signaled that inflation may have peaked. According to the Labor Department on Thursday, the consumer price index rose 7.7% on the year to October, weaker than economists had expected.

Earlier this month, however, Federal Reserve Chairman Jerome Powell said it was “very premature to think about pausing” rate hikes. Investors remain cautious as the Federal Reserve battles decades-high inflation with aggressive rate hikes. The S&P 500 and the tech-heavy Nasdaq are still down more than 17% and 29% year-to-date.

Elsewhere, geopolitical uncertainty is stirring markets, ranging from the looming energy crisis in Europe to outsized rate hikes that are devaluing the Japanese yen. (The yen, however, jumped 5% last week, signaling a potential turning point for the currency.)

Investors are looking for resilient and stable bets as the global economy experiences greater volatility. Dividend stocks from financially sound companies can be the best way to hide and earn passive income. Assuming the company is stable, these regular payments to shareholders could add a layer of protection to an investor’s portfolio in a murky macro environment.

“Dividend-stock investors had a pleasant surprise in 2022: Although many investors expected stable-dividend stocks to crash as interest rates rose and bond yields became higher attractive, dividend-paying stocks have remained remarkably resilient,” Morningstar analyst Susan Dziubinski wrote. recent note.

The company’s Dividend Yield Focus Index, which tracks 75 high-yielding stocks, is up about 4% this year. Meanwhile, the Morningstar US Market Index, which accounts for 97% of market cap, is down more than 20%. Dividend stocks have also held up much better than growth stocks this year, Dziubinski says.

“Given the economic uncertainty and market volatility, investors may consider adding inexpensive, quality dividend-paying stocks to their portfolios,” Dziubinski wrote in the Nov. 8 note. “Quality companies have the financial stability to maintain their dividends during dubious economic times, and price risk is reduced when investors can buy the shares of these companies for less than they are worth.”

Morningstar’s stock picks “trade well below our fair value estimates,” as do sectors like banks, semiconductors, medical devices and telecommunications services, the note said.

Verizon, for example, is trading 37% below the company’s estimate of $59, according to the note, which cites data from Nov. 4. The shares offer investors the highest forward yield on the company’s list at 7.01%. The company can ensure regular payments to shareholders with 50-60% of its free cash flow devoted to dividends.

“We believe the market is too focused on Verizon’s challenges to add postpaid consumer wireless customers,” said Mike Hodel, director of Morningstar. The company’s price increase earlier this year, according to Hodel, is important to the “long-term health of the narrow-moat business.”

Morningstar shared these 10 “undervalued” stocks, all of which have a forward dividend yield of 3.2% or more.

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