In a time of stock market volatility like the present, dividend stocks are often a safe haven. They can offer regular dividend payments and the potential for capital gains.
Morningstar cites three dividend stocks you may want to consider. The firm’s analysts assign all of them a wide moat, which means the companies’ have competitive advantages that will last at least 20 years.
Two of the stocks are substantially undervalued compared to Morningstar analysts’ fair value estimates, and one is slightly overvalued. The dividend yields below are forward yields, meaning they are calculated based on the last declared dividend.
British American Tobacco
(BTI)
Morningstar analyst Philip Gorham puts fair value for the stock at $50, and it recently traded at $37.40. Dividend yield: 7.35%.
The company targets a payout ratio of at least 65%, compared to 75% to 80% targeted by its U.S. competitors, Morningstar analysts said. But they expect low future dividend growth from BAT. The payout ratio represents the dividend-per-share divided by earnings-per-share.
“Although we think there is valuation upside to BAT, we have concerns that the business will be caught between a rock and a hard place in its drive to overhaul its portfolio while maintaining high levels of capital returns to shareholders,” Gorham said.
On the plus side, BAT reported “slightly better preliminary 2022 results than we had forecast, thanks to slightly lower price elasticity than we had anticipated in Europe.”
Coca-Cola
(KO)
Morningstar analyst Dan Su puts fair value for the stock at $58, and it recently traded at $60. Dividend yield: 3.05%.
Coke has raised its dividend for 61 straight years, including a 4.5% raise declared last month. “While such a streak doesn’t guarantee the dividend, it points to the company’s commitment to maintaining and increasing its dividend during periods of inflation and other economic stressors,” wrote David Harrell, editor of Morningstar’s DividendInvestor newsletter.
Looking ahead, “we expect dividend payment to grow in line with earnings growth (high single digits), with the dividend-payout ratio stabilizing around 70%, which we view as prudent,” Su wrote in a commentary. He lauds Coke’s “impressive” brands, pricing power and close retailer relations.
International Flavors & Fragrances
(IFF)
Morningstar analyst Seth Goldstein puts fair value for the stock at $140, and it recently traded at $88.60. Dividend yield 3.53%.
IFF is a global leader in specialty ingredients. The dividend grew 5.4% annualized over the past five years.
“Where the market sees caution, 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 Goldstein obviously disagrees. “We see little long-term impact from cost inflation,” he said.
“We analyzed IFF's businesses during previous times of cost inflation and found that near-term profits were hurt by inflation, but there was no long-term impact. Additionally, we think management's long-term growth strategy is likely to succeed.”
The author owns shares of Coca-Cola and International Flavors & Fragrances.
