3 Dividend Stocks for October 2022

Hi. I'm David Harrell with Morningstar Investment Management. In this monthly video series, we take a look at the dividend prospects of three stocks that are popular with income investors.

3 Dividend Stocks for October 2022

These companies with Morningstar Economic Moat Ratings of wide and narrow are popular with income investors. Data as of Sept. 30, 2022.

1. Duke Energy DUK
2. Citigroup C
3. Eastman Chemical EMN

First up this month is Duke Energy, one of the largest regulated utilities in the United States. Duke raised its dividend by 2% this year, which was its 16th consecutive annual increase. The stock now yields around 3.6%, down slightly from the 3.8% it yielded a year ago, and less than its five-year average yield of 4.1%, as share price appreciation has exceeded the rate of dividend increases. Morningstar analysts believe the current dividend is well covered and they expect the balance sheet to remain strong, in line with Duke's regulatory requirements, and they also expect average annual dividend growth of 3.5% a year through 2026. However, the stock isn't a bargain right now, as it's trading at a modest premium to its Morningstar fair value estimate.

Next up is Citigroup. Like most banks, Citigroup slashed its dividend in the wake of the 2008–09 financial crisis. Today, its dividend and stock price are still a fraction of what they were before the crisis, as Citi shareholders suffered severe dilution to save the bank from a full dissolution. Though the dividend has been flat since 2019, its five-year annualized growth rate is an impressive 37.2%. Morningstar analysts believe that Citigroup is in sound financial health and note that the capital allocation plan for Citigroup is now fairly standard, with the bank targeting roughly 25% of earnings for dividends, and remaining flexible with buybacks based the investment needs of the business. The stock is currently trading at a large discount to its fair value estimate and it yields around 4%, making Citigroup one of the better-yielding names in its industry.

Finally, Eastman Chemical EMN provides a good example of how opportunistic purchases following price declines can result in higher yields for investors. The stock was yielding 3.2% in early September, but that figure increased to around 3.8% after the share price saw a large decline when Eastman reduced its earnings guidance last month. Morningstar analysts, however, believe the market overreacted. Eastman's dividend growth has been solid at 8.4% annualized over the past five years, and even assuming ongoing quarterly earnings at the reduced guidance amount, the annual current dividend rate translates to a payout ratio of less than 40%.

I'm David Harrell with Morningstar Investment Management. Thanks for watching and see you next month.

Watch "3 Dividend Stocks for September 2022" and "Dividend Stock Deep Dive: Banks and Capital Allocation."