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Will Dividend Stocks Outperform This Year?

Morningstar’s U.S. markets strategist Dave Sekera discusses the prospects for dividend stocks in 2022.

The following is an excerpt from the video series Dividend-Stock Deep Dive, hosted by Morningstar DividendInvestor editor David Harrell. Watch the full interview.

David Harrell: Now, I believe on Jan. 4 you wrote a piece for Morningstar.com, and you noted that the equity market overall is somewhat overvalued. But you believe there was more opportunity in value stocks than growth stocks in 2022. Now, given that many mature dividend-paying companies land in that value column of the Morningstar Style Box, do you think dividend-payers in general should have good relative performance in 2022?

Dave Sekera: Well, it really breaks down to the individual companies and their fundamental performance. But yes, we do think that value stocks are going to have good economic tailwinds behind them this year. We do see a lot of undervalued opportunities for investors in that space, both for high-dividend-paying stocks as well as for stocks that don't pay dividends.

Harrell: And in that report, you wrote about energy, and that's a sector that had a very strong performance in 2021, and at the beginning of the year, it was actually the most undervalued sector. This is also a sector where we see a number of higher-yielding dividend-payers. So, what are your thoughts on the prospects for energy stocks in 2022?

Sekera: Yes, there's a lot of very good, high-quality dividend-paying stocks in the energy sector. And really, this is also a good opportunity to learn how to use Morningstar tools. So, in the energy sector, what I would do is, I would go through, pull out, using different screening applications, the energy sector, look for 3-, 4-, and 5-star-rated stocks and then also take out those stocks that might have very high uncertainty. Companies that maybe they're paying a good dividend today but may be more volatile in the future and could be those that you might consider that they might pull back on their dividends in a downcycle.

Harrell: Got it.

Sekera: From there, you can rank them from a price to fair value and then also rank them by dividend, and that helps, I think, give investors a wide choice of different types of stocks within the sector that might fit within the constraints of their portfolios.