Buy these 10 extremely undervalued stocks with strong dividend growth as recession fears linger, Morningstar analyst says

  • Dividend stocks have held up far better than growth stocks this year, per Morningstar.
  • The firm’s Dividend Yield Focus Index is up 4%, whereas the overall US Market Index is down 20%. 
  • The firm shares 10 “undervalued” stocks, all of which have a dividend yield of 3.2% or higher.

Last week, the S&P 500 and Nasdaq Composite had 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% in the year through October, weaker than economists had predicted.

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

Elsewhere, geopolitical uncertainty is roiling markets, ranging from the Europe’s looming energy crisis to outsized rate hikes 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 weathers more volatility. Dividend stocks from financially healthy companies may be the best way to hunker down and earn passive income. Assuming that the firm is stable, these regular payments to shareholders could add a layer of protection to an investor’s portfolio amid a murky macro environment. 

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

The firm’s Dividend Yield Focus Index, which tracks 75 high-yielding stocks, is up around 4% this year. Meanwhile, the Morningstar US Market Index, which represents 97% of equity market capitalization, is down more than 20%. Dividend stocks have held up far better than growth stock this year as well, Dziubinski says.

“Given ongoing economic uncertainty and market volatility, investors might consider adding cheap, quality dividend stocks to their portfolio,” Dziubinski wrote in the Nov. 8 note. “Quality companies have the financial stability to maintain their dividends during questionable economic periods, and price risk is reduced when investors can buy the stocks of these companies for less than what they’re worth.” 

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

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

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

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

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