These Quality Dividend Payers Are on Sale

For many income-oriented investors frustrated by the low payouts available from bonds, the search for added yield continues. And with the Federal Reserve saying it plans to keep interest rates low for years to come, there's been little for savers and income-seeking investors to get excited about with regard to a light at the end of the low-yield tunnel.

Some of these investors who are willing to take on added risk are finding stocks to be an attractive option. The S&P 500 index of large companies currently yields around 2.28%, and many dividend-paying stocks yield far more than that. Meanwhile, the Barclays Capital Aggregate Bond Index, a widely used proxy for the U.S. investment-grade bond market, yields less than 2% currently, and most money market fund investors are barely in the black.

By investing in stocks that have sustainable competitive advantages, that pay healthy yields, and that currently sell below what Morningstar's equity analysts think they are worth, investors willing to take on the added risk that comes with equities can obtain a boost in yield and potentially some appreciation in stock price, as well. For investors wary of the market or uncomfortable with the added risk inherent in moving money into stocks from cash or bonds, such a move might not be worth it. But for those willing to take the step, there are many quality names that can help provide an income boost over what other investment classes are paying.

Be aware that inexpensive dividend-paying stocks are not as plentiful as they were, say, at the start of the year because of market gains and a high level of interest in such stocks, so paying close attention to valuations is essential. Also be aware that favorable tax treatment of dividends, which currently are taxed at 15%, is scheduled to expire at the end of this year, after which they will be taxed at ordinary income levels unless Congress acts. For this reason, investors interested in dividend-paying stocks might want to keep them in a tax-advantaged account such as an IRA.

To find quality dividend-paying stocks, we used Morningstar's Premium Stock Screener and searched for wide-moat firms--those our analysts say have sustainable competitive advantages--currently paying yields of at least 3%, and with Morningstar Ratings for stocks of 4 or 5 stars, meaning they are currently selling at a discount to our analysts' fair value estimates. Premium users can see the full list here. Below are just a few of the names that passed the screen.

 General Electric (GE)      
Yield: 3.17%     
General Electric positions itself to be a leader in all markets in which it competes. After shedding underperforming businesses during the past few years, the firm has energy infrastructure square in its sights. Morningstar analysts believe GE will emerge as a leader in the power infrastructure market, which will be the backbone for the firm's growth. 

 Spectra Energy       
Yield: 4.19%     
In 2007,  Duke Energy (DUK) split its electricity and gas businesses by spinning off Spectra Energy, which retains all of Duke's natural gas gathering, processing, transmission, storage, and distribution assets. Spectra is one of the largest midstream companies in North America, with a favorably positioned asset footprint that should continue to foster attractive internal growth opportunities for years to come.

 Intel (INTC)
Yield: 4.32%
Intel is the dominant force in the roughly $30 billion computer processor market. It has benefited tremendously from the proliferation of personal computers in the past few decades. Intel has long held the lead in microprocessor technology and performance, while  AMD (AMD) has mostly been an also-ran. Although AMD has emerged periodically as a threat, such occurrences are few and far between. After being caught off-guard several years ago when AMD narrowed the competitive gap between the two firms, Intel has gone on an impressive streak of outinnovating its smaller foe while reasserting its stranglehold on the microprocessor market. 

Data as of Dec. 10. 

A version of this article appeared Sept. 5.