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10 Cheap U.S. Stocks With Safe Dividends

These stocks in the Morningstar Dividend Yield Focus Index look undervalued today.

Susan Dziubinski 17 November, 2022 | 4:48AM
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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. The Morningstar Dividend Yield Focus Index, which is a collection of quality stocks with durable dividends, is up just over 4% this year, while the Morningstar US Market Index, which represents the broader market, is down more than 20%.

Why Are Stable Dividend Stocks Outperforming in 2022?

Of course, energy stocks, which tend to offer high and stable dividends, are outperforming everything else in 2022, which has buoyed the relative performance of dividend stocks as a group.

But that’s only part of the story. Dividend stocks have held up far better than growth stocks—some of which pay no dividends—this year. In a new report called Why Haven’t Rising Interest Rates Sunk Dividend-Paying Stocks?, Morningstar Indexes strategist Dan Lefkovitz and analyst Saumya Gattani argue that the link between dividend payers and interest rates has, in fact, been unclear over time. “There have been plenty of periods like 2004-2006, when rates rose but dividend stocks dramatically outperformed growth stocks,” they say.

Given ongoing economic uncertainty and market volatility, investors might consider adding cheap, quality dividend stocks to their portfolios. 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.

10 Cheap Stocks to Buy With Stable Dividends

To find undervalued stocks with safe dividends, we turn to the Morningstar Dividend Yield Focus Index. The dividend stocks on this list are among the index’s most heavily weighted constituents, and they’re also cheap, trading well below our fair value estimates as of Nov. 4, 2022.

1) Verizon Communications VZ

2) Philip Morris International PM

3) Cisco Systems CSCO

4) Broadcom AVGO

5) Medtronic MDT

6) 3M MMM

7) Blackstone BX

8) Truist Financial TFC

9) Duke Energy DUK

10) PNC Financial Services PNC

Here’s a little bit about each stock along with some key Morningstar metrics about each. All data is through Nov. 4.

Verizon Communications

  • Morningstar Rating: 5 stars
  • Economic Moat Rating: Narrow
  • Forward Dividend Yield %: 7.01
  • Industry: Telecom Services

Verizon (VZ) is clearly a cheap stock, trading a whopping 37% below our fair value estimate of $59. We think the market is overly focused on Verizon’s challenges to add postpaid consumer wireless customers, says Morningstar director Mike Hodel. Hodel notes that Verizon’s price increase earlier this year is important for the long-term health of the narrow-moat company. This dividend stock offers the highest forward yield on our list; Hodel observes that 50% to 60% of Verizon’s free cash flow is committed to the dividend.

Philip Morris International

  • Morningstar Rating: 4 stars
  • Economic Moat Rating: Wide
  • Forward Dividend Yield %: 5.65
  • Industry: Tobacco

Philip Morris (PM) stock currently trades about 13% below our fair value estimate of $103. Morningstar director Philip Gorham notes that the business remains robust even in the face of high inflation. Philip Morris targets a payout ratio of 75%, which is lower than its industry peers; Gorham says that’s appropriate, given the company’s opportunities to invest in reduced-risk alternatives to cigarettes (such as heatsticks) at a high return rate on the capital invested. This is a safe dividend stock with an attractive forward yield.

Cisco Systems

  • Morningstar Rating: 4 stars
  • Economic Moat Rating: Wide
  • Forward Dividend Yield %: 3.41
  • Industry: Communication Equipment

We think Cisco (CSCO) stock is worth $54 per share; shares currently trade about 18% below that. The dominant force in enterprise networking, Cisco maintains leading market shares across switching, routing, and wireless access, observes analyst William Kerwin. Given our confidence in Cisco’s leadership, we recently upgraded our Morningstar Economic Moat Rating on the company to wide from narrow. Kerwin calls the company’s shareholder returns program “excellent,” and the company maintains a growing dividend at a high payout ratio.

Broadcom

  • Morningstar Rating: 4 stars
  • Economic Moat Rating: Narrow
  • Forward Dividend Yield %: 3.52
  • Industry: Semiconductors

Broadcom (AVGO) stock looks cheap, trading 25% below our $624 fair value estimate. Morningstar sector strategist Abhinav Davuluri says Broadcom is among “the heavyweight class of technology leaders,” thanks to the quality of its products that go into several different end markets, including high-end smartphones. Davuluri applauds the company’s skill at purchasing companies with best-of-breed products at attractive valuations and driving cost synergies; it plans to close its acquisition of VMware in late 2023.

Medtronic

  • Morningstar Rating: 5 stars
  • Economic Moat Rating: Wide
  • Forward Dividend Yield %: 3.21
  • Industry: Medical Devices

Medtronic (MDT) stock trades significantly below our $129 fair value. The largest pure-play medical device maker is a key partner for its hospital customers, thanks to its diversified product portfolio aimed at a wide range of chronic diseases, explains Morningstar senior analyst Debbie Wang. The company’s plans to spin off its patient monitoring and respiratory innovations businesses will only help the company pivot more toward faster-growing markets, she adds. Medtronic has raised its dividend for 45 consecutive years.

3M

  • Morningstar Rating: 4 stars
  • Economic Moat Rating: Wide
  • Forward Dividend Yield %: 4.77
  • Industry: Conglomerates

3M (MMM) is a cheap stock by our measures, as shares trade 32% below our $183 fair value estimate. Known for its research and development laboratory, 3M leverages its science and technology across multiple product categories, says Morningstar senior analyst Josh Aguilar. The company has a strong shareholder orientation, he adds, with a payout ratio that typically ranges between 50% and 60%, which is at the high end when compared with the payout ratios of its multi-industrials peers.

Blackstone

  • Morningstar Rating: 4 stars
  • Economic Moat Rating: Narrow
  • Forward Dividend Yield %: 5.49
  • Industry: Asset Management

Blackstone (BX) stock trades 22% below our fair value estimate of $115. One of the world’s largest alternative asset managers, Blackstone has built a team with decades of industry experience revitalizing companies through cost-cutting, acquisitions, or other strategic initiatives, says Morningstar strategist Greggory Warren. Diversification and solid fundraising have helped the firm weather the downturn in the equity and credit markets, he adds. We expect the firm to continue to favor dividend payouts versus share repurchases.

Truist Financial

  • Morningstar Rating: 4 stars
  • Economic Moat Rating: Narrow
  • Forward Dividend Yield %: 4.76
  • Industry: Banks – Regional

Truist (TFC) stock is undervalued, with shares trading about 28% below our fair value estimate of $61. The result of a merger between BB&T and SunTrust, Truist boasts some of the best scale among the U.S. regional banks and a uniquely complete platform across retail, commercial, advisory, wealth, and insurance, says Morningstar strategist Eric Compton. Like most banks, Truist returns more capital through shares repurchases than dividends, which is sensible for companies whose earnings can be volatile, he concludes.

Duke Energy

  • Morningstar Rating: 4 stars
  • Economic Moat Rating: Narrow
  • Forward Dividend Yield %: 4.29
  • Industry: Utilities – Regulated Electric

Duke Energy (DUK) isn’t as cheap as others stocks on our list, trading just 7% below our fair value estimate of $101. The company is divesting its commercial renewable energy business—one of the largest wind and solar developers in the United States—targeting a sale in mid-2023, reports Morningstar senior analyst Andy Bischof. We like that proceeds will be used to reduce debt and offset equity needs. Duke’s dividend policy is to pay out 65%-75% of earnings, which is appropriate given its high quality and relative stable regulated assets, he adds.

PNC Financial Services

  • Morningstar Rating: 4 stars
  • Economic Moat Rating: Narrow
  • Forward Dividend Yield %: 3.83
  • Industry: Banks – Regional

PNC stock (PNC) currently trades 14% below our $183 fair value estimate. PNC (which is now the second-largest regional bank in the U.S.) has succeeded at expanding its customer base both in commercial banking and in retail and has made transformational banking-related acquisitions, says Compton. Compton adds that PNC is one of the better operators we cover. As with Truist, we think PNC’s capital allocation strategy is sound, as it too returns more capital through share repurchases than through dividends.

What Is the Morningstar Dividend Yield Focus Index?

A subset of the Morningstar US Market Index (which represents 97% of equity market capitalization), the Morningstar Dividend Yield Focus Index tracks the top 75 high-yielding stocks that meet our screening requirements for quality and financial health.

How are the stocks selected for the index? Only securities whose dividends are qualified income are included; real estate investment trusts are tossed out. Companies are then screened for quality using the Morningstar Economic Moat and Uncertainty ratings. Specifically, companies must earn a moat rating of narrow or wide and an Uncertainty Rating of Low, Medium, or High; companies with Very High or Extreme Uncertainty Ratings are excluded. The index includes a screen for financial health using a distance-to-default measure, which uses market information and accounting data to determine how likely a firm is to default on its liabilities; it is a measure of balance-sheet strength.

The 75 highest-yielding stocks that pass the quality screen are included in the index, and constituents are weighted according to the total dividends paid by the company to investors.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
3M Co129.04 USD0.81Rating
Blackstone Inc90.00 USD1.67Rating
Broadcom Inc529.91 USD-0.70Rating
Cisco Systems Inc48.40 USD-0.35Rating
Duke Energy Corp99.62 USD1.10Rating
Medtronic PLC79.12 USD0.13Rating
Philip Morris International Inc98.25 USD0.14Rating
PNC Financial Services Group Inc167.65 USD0.69Rating
Truist Financial Corp46.92 USD1.06Rating
Verizon Communications Inc39.02 USD0.26Rating

About Author

Susan Dziubinski

Susan Dziubinski  Director of Content for Morningstar.com

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