We think the payouts on these undervalued names are sustainable.
As the novel coronavirus threatens the health of the economy, many companies are trying to shore up their liquidity. Some--such as Occidental Petroleum (OXY), Apache (APA), and Targa Resources (TRGP)--have cut their dividends. Others--including Boeing (BA), Ford (F), and Macy’s (M)--have suspended theirs entirely.
In an effort to find attractively priced companies with
defensible dividends in the face market uncertainty, we turn to the Morningstar
Dividend Yield Focus Index. A subset of the Morningstar U.S. Market Index
(which represents 97% of equity market capitalization), this index tracks the
top 75 high-yielding stocks that meet our screening requirements for quality
and financial health--with Distance to Default being one of those measures.
How are the index constituents chosen? For starters, 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 Fair Value 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. We then screen for financial health using our Distance to
Default measure, which uses market information and accounting data to determine
how likely a firm is to default on its liabilities. 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.
Eight of the companies added to the index during its latest
reconstitution in March are undervalued according to our metrics today.
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