Heightened volatility and a looming recession make it difficult for investors to find returns. But dividend-paying stocks provide stable and consistent cash flow, even during downturns. Morningstar analysts shared 10 top undervalued stocks to buy for long-term cash flow. After a tough final quarter of 2022 equities started this year strong, with renewed hopes that inflation had peaked, the Federal Reserve would pivot from its rate-hiking regime, and any recession that might occur would be muted thanks to robust wage growth and the savings American consumers had accumulated during the pandemic.
Three months later and on the heels of the greatest banking crisis the US has experienced since the 2007 recession, that optimism has largely given way to a cloud of trepidation and uncertainty hanging over Wall Street.
Now, the Fed is forced to find a delicate balance between reigning in runaway inflation and keeping the banking crisis from bleeding into other sectors. It’s certainly a daunting task, since any kind of credit crunch could have enormous ramifications on private equity, private lending, and commercial real estate businesses — potentially plummeting equity valuations and aggravating an upcoming recession.
“The central nervous system of the economy, which is the financial system, is going to be more cautious,” said Nanette Abuhoff Jacobson, the global investment strategist at Hartford Funds, in a recent interview with Insider.
“Caution means they’re going to lend less, and that means that consumer and business activity will slow down. That in and of itself is going to cause the US economy to slow down, but it will probably have broader ripple effects,” she continued.
10 cheap dividend-paying stocks to buyWhen faced with a looming economic downturn, one traditional strategy for investors to use to hedge recessionary risks is to buy dividend-paying stocks. These stocks are considered to be more recession-proof, since they offer stable cash flows even as the macroeconomy slows down.
But in times like these — when markets are highly volatile and tumultuous — it’s certainly no easy task for investors to find stocks with steady returns. That’s especially true as the current banking crisis drives US markets into “unprecedented times,” wrote Morningstar equity strategists Verushka Shetty and Eric Compton.
“Searching for yield in this type of environment can be risky,” the analysts wrote in a recent note. “Price risk remains elevated, as does the risk that companies may not be able to maintain current dividends due to economic strain.”
In the note, the analysts identified the top 10 high-quality stocks that not only paid dividends, but were also held by top Wall Street fund managers.
Specifically, they focused on finding the stocks with enough competitive advantages to maintain a high probability of generating enough future cash flow and long-term excess returns to continue paying out dividends to investors. Shetty and Compton were also careful to select for firms that are currently yielding higher dividends than the S&P 500, which currently has a yield of around 1.74%.
“The average price to fair value estimate for the top dividend-yielding stocks was 0.8, indicating that we view these high-yielding stocks as currently undervalued,” the analysts added. “We continue to believe that the best way for investors to protect their capital is to invest in quality businesses that are trading at attractive prices.”
Below is the full list of top dividend-paying stocks identified by Shetty and Compton, along with each company’s ticker and market capitalization.