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10 Cheap Stocks With Growing Dividends

Here's an update on the cheapest stocks in the Morningstar US Dividend Growth Index and what stocks are in and out as of the latest reconstitution.

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Here in Chicago, you're either a Cubs fans or a White Sox fan. (Given that my husband and I met at what was then called Comiskey Park, you know where my allegiance lies.) In much the same way, investors who favor dividend-paying stocks generally fall into one of two camps.

Those investing for current income usually prefer the dividend stocks with the highest yields, which means leaning toward utilities, REITs, and consumer defensive names. Often such high-yielding fare are highly leveraged, lower-quality companies.

Other dividend investors are less focused on absolute yield and instead favor stocks with a history of increasing their dividends. These dividend growers are able to raise their payouts over time because their cash flows are solid--they're generally higher-quality companies.

Today, we're providing some investment ideas for that latter group of dividend investors, plucking insights from the Morningstar US Dividend Growth Index. The index focuses on stocks that have grown--and are poised to continue to grow--their dividends. To be included in the index, stocks must meet the following criteria:

  1. The stock's dividend must be qualified income. As such, real estate investment trusts are excluded from the index.
  2. The stock's indicated dividend yield must not be in the top 10% of the investable universe. This criterion helps weed out firms that are more likely to experience dividend cuts and financial distress.
  3. The stock must have a positive consensus earnings forecast and a dividend payout ratio less than 75%. These metrics help measure the sustainability of the dividend growth.
  4. The stock must have at least five years of uninterrupted annual dividend growth.

We reconstitute the index annually.

Here are the top additions from the December 2018 reconstitution, ranked by their weighting in the index.

These are the most heavily weighted stocks in the index that were cut in December.

Four of the names--  DowDuPont (DWDP),  CVS Health (CVS), American International Group (AIG), and Keurig Dr Pepper (KDP)--were let go because they broke their five-year continuous dividend-growth streaks. The indicated dividend yields on the remaining six stocks--  Qualcomm (QCOM), LyondellBasell Industries (LYB), General Mills (GIS), Edison International (EIX), International Paper (IP), and Principal Financial Group (PFG)--landed in the top 10% of the index’s investible universe at the time of reconstitution.

And here are the cheapest stocks among the top 50 names in the index as of this writing.

Here's a closer look at a few of these undervalued companies.

Bristol-Myers Squibb (BMY)
Price/Fair Value (as of 1/28/19): 0.75
Forward Yield: 3.35%
Economic Moat: Wide
Moat Trend: Stable

According to sector director Damien Conover:

"Adept at partnerships and acquisitions, Bristol-Myers Squibb has built a strong portfolio of drugs and a robust pipeline. While the company faces significant continued generic pressures on virology drugs, we expect its next generation of drugs to fill the patent holes over the near term, supporting its wide moat and steady growth potential. Further, by selling off business lines unrelated to its core pharmaceutical strategy, the company has been streamlined to focus primarily on specialty pharmaceuticals.

"We continue to view the stock as undervalued, with the Celgene deal creating value from strong Revlimid cash flows and by expanding Bristol's pipeline, a core pillar in our wide moat rating."

 Wells Fargo (WFC)
Price/Fair Value (as of 1/28/19): 0.77
Forward Yield: 3.59%
Economic Moat: Wide
Moat Trend: Stable

Analyst Eric Compton explains in his latest Analyst Note:

"Wide-moat Wells Fargo continued to wade through multiple issues in the quarter. The bank, as expected, recorded another $175 million legal accrual related to a settlement with the Attorneys General of all 50 states (as well as the District of Columbia) with regards to many of the already disclosed issues the bank is facing.

"We still believe the bank has meaningful room to improve returns on equity with further expense management, and we do not believe the bank needs significant revenue growth to improve its returns, but it will be a bumpy ride to get there as long as the bank remains under the regulatory microscope.

"The bank has a dividend yield of over 3.5%, which should make it a little easier to wait for the story to play out.”

Comcast (CMCSA)
Price/Fair Value (as of 1/28/19): 0.80
Forward Yield: 2.35%
Economic Moat: Wide
Moat Trend: Stable

Sector director Mike Hodel highlighted Comcast in his quarter-end report on the communication services sector:

"With the bidding wars surrounding Fox and Sky resolved, a major source of uncertainty has lifted. While we were disappointed that Comcast was willing to pay a high price to win Sky, we believe management still showed discipline in walking away from Fox. We believe that the firm is very well-positioned competitively thanks to the strength of its core cable networks and the solid media franchises it possesses. We expect these strengths will serve Comcast well even as the television business continues to evolve."

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Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.