Dividend stocks are appealing for their potential regular, hopefully rising, payouts and capital gains. That’s especially true in a time of equity-market volatility like the present one.
In choosing dividend stocks, you want to stay away from companies that are likely to cut their dividends.
“Morningstar research has found that two particular factors can lead investors to stocks with safe dividends: economic moats and distance-to-default scores,” writes Morningstar investment specialist Susan Dziubinski.
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“Companies with economic moats have significant competitive advantages and are able to successfully sustain their profits and fend off competitors.”
As for distance to default, it “measures balance sheet strength and the likelihood of bankruptcy,” she explained.
Morningstar cites three wide-moat companies with solid balance sheets and favorable distance-to-default scores that are trading below its fair value estimates. “We think of them as superior dividend stocks on sale,” Dziubinski said.
Comcast (CMCSA): Morningstar analyst Michael Hodel puts fair value for the media/telecommunications giant’s stock at $60. It recently traded at $37.85. Dividend yield: 2.97%.
“Comcast’s core cable business enjoys significant competitive advantages but will likely see growth slow as competition for incremental customers heats up,” he wrote in a commentary.
“NBCUniversal isn’t as well positioned but holds unique assets, including core content franchises and theme parks, that should help ease the transition away from the traditional television business.”
So, “overall, we expect Comcast will deliver modest growth with strong cash flow for the foreseeable future,” Hodel said. “Comcast will remain the dominant broadband provider in many parts of the country.”
International Flavors & Fragrances (IFF): Morningstar analyst Seth Goldstein puts fair value for the specialty ingredient maker’s stock at $140. It recently traded at $93.70. Dividend yield: 3.36%.
The stock has underperformed since the beginning of 2022. “We view the current price as an excellent opportunity for long-term investors to pick up shares,” Goldstein wrote.
“The market is concerned that cost inflation will continue to hurt profits and is skeptical of management's long-term growth strategy.”
But, “we see little long-term impact from cost inflation,” Goldstein said. “Additionally, we think management's long-term growth strategy is likely to succeed. The plan to invest in capacity-constrained businesses will allow IFF to grow volumes above the industry rate.”
Western Union (WU): Morningstar analyst Brett Horn puts fair value for the money-transfer company’s stock at $18. It recently traded at $13.40. Dividend yield: 6.8%.
“Western Union continues to experience revenue declines as it battles its way through difficult conditions,” he wrote in a commentary.
“And the company is likely to remain under pressure in 2023 as management invests in an attempt to stabilize and grow the business.”
As for the future, “we continue to see the company's digital business performance as critical,” Horn said
“The key to maintaining the company's competitive position is its ability to hold on to share in the face of an industry shift in this direction. On that front, there were some encouraging signs” in the fourth quarter, he said.
