Dividend stocks often underperform when interest rates rise, because higher rates make them less attractive compared with bonds.
But that hasn’t been the case in 2022. While the S&P 500 has dropped 17% so far this year, the Dow Jones U.S. Select Dividend Index has slipped only 1%.
Some of that is because energy stocks, which are major dividend payers, have soared this year. But Morningstar analysts also say the link between dividend stocks and interest rates has been unclear over time.
So how should we approach dividend stocks now?
“Given ongoing economic uncertainty and market volatility, investors might consider adding cheap, quality dividend stocks to their portfolios,” a Morningstar investment specialist, Susan Dziubinski, wrote in a commentary.
“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.”
She created a list of 10 such stocks. They’re all undervalued compared with Morningstar fair-value estimates.
- Verizon Communications (VZ)
- Broadcom (AVGO)
- Cisco Systems (CSCO)
- 3M (MMM)
- Blackstone (BX)
- Medtronic (MDT)
- Truist Financial (TFC)
- PNC Financial Services (PNC)
- Dominion Energy (D)
- Public Service Enterprise (PEG)
Verizon: Morningstar analyst Michael Hodel assigns the company a narrow moat (competitive advantage) and puts fair value for the stock at $59. It recently traded at $37 -- almost 60% below fair value -- and has a dividend yield of 7.02%.
“We continue to believe the market is overly focused on Verizon’s struggle to add postpaid consumer wireless customers in recent quarters,” he wrote in a commentary.
“The firm is the share leader in this category, which creates a headwind in an environment where the carriers’ networks look increasingly alike and rivals are marketing with a similar level of aggression.”
Further, “this dynamic is especially challenging following a price increase, as Verizon instituted earlier this year, but taking up pricing is important for the long-term health of the firm and the industry.”
Broadcom: Morningstar analyst Abhinav Davuluri gives the company a narrow moat and puts fair value at $624. It recently traded at $530 -- 18% below fair value -- and has a dividend yield of 3.16%.
“Broadcom reported strong fiscal third-quarter results [Sept. 1] slightly ahead of our expectations,” he wrote in a commentary. “The firm’s results were buoyed by healthy networking demand led by cloud and enterprise data-center spending.”
Moreover, “despite slowing consumer demand, Broadcom’s networking, storage, and broadband business units have proven resilient. Also, the firm’s execution on its software acquisitions such as Symantec and CA Technologies is admirable,” Davuluri said.
“We think Broadcom’s wireless segment should also benefit from Apple’s iPhone launch.”
