The stocks of these companies with a history of raising their dividends look undervalued.
Dividend-growth stocks—those companies with a history of steady and increasing dividends over time—are lagging the broader market in 2023: The performance of the Morningstar US Dividend Growth Index is behind that of the Morningstar US Market Index by 12 full percentage points.
Why the dramatic underperformance of dividend-growth stocks? Blame this year’s narrow, tech-led stock market, says Dan Lefkovitz, a strategist with Morningstar Indexes. “Dividend payers may lag during market environments led by hot growth stocks, but in down periods like 2022 and 2018, they show resilience,” he observes.
In fact, dividend-growth stocks have three things going for them today:
Companies with growing dividends tend to be profitable and financially healthy—two valuable qualities during periods of economic slowdown such as we’re experiencing this year.
Such companies are also more likely to have competitive advantages that may allow them to pass along price increases and thereby maintain margins during inflationary times.
Dividend-growth stocks tend to be less volatile than the overall stock market and are therefore attractive investments for playing a little defense.
To uncover some cheap dividend-growth stocks to investigate further, we’re turning to the Morningstar US Dividend Growth Index.
These stocks from the Morningstar US Dividend Growth Index have increased their dividend payments over the past five years, pay out no more than 75% of their earnings in the form of dividends, possess competitive advantages (as measured by the Morningstar Economic Moat Rating), and were trading at among the widest discounts to our fair value estimates as of Aug. 4, 2023.
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