Growth stocks have soared higher this year on the back of artificial intelligence hype. Most dividend stocks have been left in the dust, but that means they’re cheap right now. Morningstar found 10 stocks that have consistently raised dividends every year for the last 5 years. The S&P 500 has skyrocketed over 16% year-to-date, led by growth-focused tech stocks leading the AI revolution. But dividend stocks, their lower-growth, less exciting counterparts, have been left in the dust.
For instance, the S&P 500’s Dividend Aristocrats, a collection of stocks that have raised their dividends every year for the past 25 years, is up a mere 5% year-to-date. This group of blue-chip companies have, for the most part, traded funding growth for shareholder payouts, and the result is that many of them missed out on the rally this year.
But just because dividend stocks are lagging behind the market today doesn’t mean they’re bad investments. In fact, their cheap price tags might make them excellent additions to a well-rounded portfolio — and Morningstar’s Susan Dziubinski has found 10 undervalued dividend stocks that have consistently been increasing their payouts for half a decade.
No love for dividend stocks this yearAll public companies are eventually faced with a choice: reinvest earnings to fund the future growth of their businesses, or return those earnings to shareholders in the form of dividends.
For management teams at technology companies, the choice is an easy one — focus on growth, and the development of new technologies, to increase profits. Those are the same sort of companies that have been the primary beneficiaries of this year’s market rally, particularly if the technology they focused on was related to artificial intelligence.
AI hype propelled many tech stocks to new heights as retail and institutional investors alike poured money into the sector this year, hoping to win big on the latest AI breakthroughs. The result has been a boom year for companies like Nvidia, Microsoft, and Meta Platforms — but the companies focusing on returning money to shareholders have largely missed out.
At the same time, investors who preferred the safety of dividends to the volatility of high-growth stocks found another alternative this year: short-term Treasuries.
Whereas usually dividend stocks provide stronger returns for investors, the Fed’s restrictive monetary policy and rate hikes have juiced the yields of short-term US Treasuries, pushing them above 5% earlier this year for the first time since 2007.
This one-two punch of a high-growth stock rally and high yields for bonds has left many dividend-paying stocks feeling low. But that might be an opportunity for smart investors.
10 cheap investments with growing dividendsLate last week, Morningstar put together a list of 10 stocks pulled from its US Dividend Growth Index, which “tracks US-based securities with a history of uninterrupted dividend growth.”
Each stock below has raised their dividend over the last five years, but doesn’t pay out more than 75% of earnings in dividends, meaning that they aren’t overextending themselves by paying shareholders too much. They also have strong competitive advantages in the form of an economic moat, or advantages like network effects, switching costs, etc. And finally, all of them are trading at a discount to Morningstar analyst fair value estimates.
Along with each stock is its ticker, price-to-fair-value ratio, Morningstar Economic Moat rating, forward yield, Morningstar Capital Allocation rating, and its industry.