10 Superior Dividend Stocks
These stocks are good choices whether you're looking for dividend growth, down-market defense, or inflation protection.
While they may not be the highest-yielding stocks around, dividend-growth stocks--those that have a history of increasing their payouts over time--have plenty going for them.
For starters, the management teams at these companies are focused on delivering a growing cash stream to their shareholders--and income is a key component of total return. That's a shareholder-friendly mindset.
Moreover, companies that consistently ratchet up their dividends are usually profitable and financially healthy--two especially valuable qualities during a market downturn.
And lastly, dividend growers provide some inflation protection, which is a plus for retirees. "Income-focused investors receive a little 'raise' when a company increases its dividend," reminds Morningstar director of personal finance Christine Benz.
Given their multipurpose role, dividend-growth stocks are suitable for almost any type of investor.
To uncover a few dividend-growth stocks to investigate further, we're turning to the top constituents in the Morningstar US Dividend Growth Index.
The index focuses on companies with a history of dividend growth and an ability to sustain it. The index includes U.S.-based securities that pay qualified dividends and that have increased their dividend payments over the past five years. To gauge the sustainability of dividend growth into the future, eligible constituents must display positive consensus earnings forecasts from the analyst community, and must also pay out no more than 75% of their earnings in the form of dividends. Constituents are weighted in proportion to the total pool of dividends available to investors. (Read more about the index specifics here.)
Given the index's construction rules, its largest constituents are relatively stable mega-cap companies.
Here's a closer look at the stocks from the list trading at 4- and 5-star levels.
Microsoft (MSFT)
The tech giant has reinvented itself as a cloud leader. It's one of only two providers that can deliver a range of platform-as-a-service/infrastructure-as-a-service solutions at sale.
"Microsoft continues to use its dominant position of on-premises architecture to allow customers to move to the cloud easily and at their own pace, which we believe will continue," notes analyst Dan Romanoff. "Adoption of cloud services in the form of SaaS, PaaS, and IaaS remains robust for Microsoft, and the company has passed inflection points where cloud revenue is strong and margins continue to improve."
Moreover, Microsoft has transitioned to a subscription model, embraced the open-source movement, and exited the low-growth mobile handset business and is driving its gaming business to the cloud. The company is more focused, and we think it offers more impressive revenue growth with high and expanding margins. Importantly, we think the company will continue to buy back shares, shrink the share count, and raise the quarterly dividend over the next several years.
"We believe wide-moat Microsoft is firing on all cylinders and remains a safe harbor in a sea of rich software valuations," he concludes.
Chevron (CVX)
The integrated energy company--which is the second-largest oil producer in the United States--has carved out a narrow Morningstar Economic Moat Rating based on the quality of its upstream portfolio.
"Historically, Chevron has benefited from an oil-leveraged portfolio that has led to peer-leading margins and returns on capital," explains sector strategist Allen Good. "We expect it to maintain its edge as it moves into the next phase of growth, which is centered on leveraging its large Permian Basin position."
We forecast improved cash flow in the next five years, thanks to cost-cutting and the addition of higher-margin volumes.
Management earns a Morningstar Stewardship Rating of Exemplary.
"The firm remains focused on cash returns to shareholders," Good says. "Its preferred method is through dividends, which it has historically steadily increased. It has also returned to repurchasing shares, but in measured, sustainable levels. Its current investment plans leave it flexible in the event of volatile oil prices and ensure dividend growth in the years to come."
Wells Fargo (WFC)
"Wells Fargo is one of the most controversial banks under our coverage," admits analyst Eric Compton. After all, negatives plaguing the firm--the asset cap, CEO succession, and more fines among them--are far from resolved. That being said, we think the market is overly pessimistic about the long-term earnings power of the bank, he says.
To justify today's stock price, investors are assuming the bank has no ability to lower costs and that it still faces material revenue declines, observes Compton. We, meanwhile, expect expense cuts to materialize by 2021 and that individual franchises can return to revenue growth. Over time, we think Wells Fargo can consistently earn 14% returns on tangible equity, which is at the low end of management's goal.
"Reforming the bank has been a massive undertaking and therefore not an easy process," Compton says. "While progress has seemed slow and sometimes disappointing, management has not been idle. We like the company's emphasis on returning capital to shareholders, and we expect dividends and repurchases to continue at a healthy rate."
Pfizer (PFE)
This entrenched industry leader earns a wide economic moat because of its patents, economies of scale, and powerful distribution network.
"Pfizer's size establishes one of the largest economies of scale in the pharmaceutical industry," posits sector director Damien Conover. "In a business where drug development needs a lot of shots on goal to be successful, Pfizer has the financial resources and the established research power to support the development of more new drugs. Also, after many years of struggling to bring out important new drugs, Pfizer is now launching several potential blockbusters in cancer, heart disease, and immunology."
We expect Pfizer's innovative new drugs to drive long-term growth and offset the loss of patent protection on others--especially now that the firm has decided to divest is off-patent division to create a new company in combination with Mylan (MYL). Conover adds that although management has made some poor capital-allocation decisions in the past, the current team is more focused on share buybacks and dividends.
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