10 Cheap Dividend-Growth Stocks to Buy

Dividend-growth stocks—those companies with a history of steady and increasing dividends over time—have lagged the broader market lately: The Morningstar US Dividend Growth Index has underperformed the Morningstar US Market Index by 14 full percentage points over the trailing one-year period.

Why the dramatic underperformance of dividend-growth stocks? Blame the narrow, tecnology-led stock market during much of that time, says Dan Lefkovitz, a strategist with Morningstar Indexes. “Dividend-payers may lag during market environments led by hot growth stocks, but in down periods like 2022 and 2018, they show resilience,” he observes.

Dividend-growth stocks have three things going for them today:

• Companies with growing dividends tend to be profitable and financially healthy, two valuable qualities during periods of economic uncertainty.
• Such companies are also more likely to have competitive advantages that may allow them to pass along price increases and thereby maintain margins during inflationary times.
• Dividend-growth stocks tend to be less volatile than the overall stock market and are therefore attractive investments for playing a little defense.

To uncover some cheap dividend-growth stocks to investigate further, we’re turning to the Morningstar US Dividend Growth Index.

10 Cheap Dividend-Growth Stocks to Buy

These stocks from the Morningstar US Dividend Growth Index have increased their dividend payments over the past five years, pay out no more than 75% of their earnings in the form of dividends, possess competitive advantages (as measured by the Morningstar Economic Moat Rating), and were trading at among the widest discounts to our fair value estimates as of March 1, 2024.

1. Albemarle ALB
2. FMC Corp. FMC
3. Sirius XM Holdings SIRI
4. Lithia Motors LAD
5. Baxter International BAX
6. Polaris PII
7. ResMed RMD
8. Comerica CMA
9. Eastman Chemical EMN
10. Humana HUM

Here’s a little bit from Morningstar analysts about each of the stocks from the list. All data is as of March 1, 2024.

Albemarle

• Price/Fair Value: 0.48
• Morningstar Economic Moat Rating: Narrow
• Forward Yield: 1.12%
• Morningstar Capital Allocation Rating: Standard
• Industry: Specialty Chemicals

Albemarle tops our list of cheap dividend-growth stocks—but its forward yield is among the lowest on our list, serving as a reminder that dividend-growth stocks aren’t necessarily high-yielding stocks. One of Morningstar’s top lithium picks, Albemarle is among our analysts’ favorite 33 undervalued stocks for the first quarter. Morningstar strategist Seth Goldstein expects lithium demand to more than triple by 2030, providing Albemarle with solid dividend growth potential ahead; we forecast earnings to average around 30% of net income over the next five years. In early March, the company announced a surprise plan to issue convertible preferred shares; depending on the terms of the offering, which have yet to be announced as of this writing, we may adjust our fair value estimate. Albemarle stock trades 52% below our current $300 fair value estimate.

FMC Corp

• Price/Fair Value: 0.52
• Morningstar Economic Moat Rating: Narrow
• Forward Yield: 4.05%
• Morningstar Capital Allocation Rating: Standard
• Industry: Agricultural Inputs

The first of three new names on our list of cheap dividend-growth stocks to buy, FMC is a pure-play crop chemical producer. FMC is also among our analysts’ top 33 undervalued stocks for the first quarter. While we think that the firm’s distributions are appropriate and that the company will generate sufficient cash flows to maintain its dividend, FMC faces cyclicality risk and as a result is carrying elevated leverage on the books as chemical crop demand approaches its cyclical bottom, explains Morningstar’s Goldstein. We think this dividend-growth stock looks attractive as it trades 48% below our $110 fair value estimate.

Sirius XM Holdings

• Price/Fair Value: 0.57
• Morningstar Economic Moat Rating: Narrow
• Forward Yield: 2.49%
• Morningstar Capital Allocation Rating: Exemplary
• Industry: Entertainment

Also new to our list of undervalued dividend-growth stocks, Sirius XM trades 57% below our fair value estimate of $7.50. Warren Buffett’s Berkshire Hathaway recently increased its position in the dividend stock. The company consists of two businesses: SiriusXM and Pandora. Sirius XM management prioritizes shareholder returns, says Morningstar senior analyst Matthew Dolgin; the firm earns an Exemplary capital allocation rating. While its board issued a special dividend in 2022 because of company outperformance in 2021, we don’t expect another special dividend anytime soon, adds Dolgin.

Lithia Motors

• Price/Fair Value: 0.60
• Morningstar Economic Moat Rating: Narrow
• Forward Yield: 0.67%
• Morningstar Capital Allocation Rating: Standard
• Industry: Auto and Truck Dealerships

Lithia Motors sells new and used vehicles and provides related services, often in rural markets where there are no competitors within 100 miles. This rural focus gives Lithia pricing power and contributes to its economic moat, says Morningstar strategist David Whiston. Whiston calls the balance sheet “healthy” and commends the firm for raising its dividend in 2020 despite the coronavirus pandemic. We view Lithia’s growth runway as excellent; in fact, Whiston calls Lithia “the most exciting growth story in our auto dealer coverage.” This cheap dividend-growth stock trades 40% below our $500 fair value estimate.

Baxter International

• Price/Fair Value: 0.61
• Morningstar Economic Moat Rating: Narrow
• Forward Yield: 2.83%
• Morningstar Capital Allocation Rating: Standard
• Industry: Medical Instruments and Supplies

Of the dividend-growth stocks on our list, Baxter International may require a longer-term mindset than some others. True, the firm can claim top-tier positions in most of its product lines and benefits from switching costs, which underpin its narrow moat rating. However, supply chain disruptions and economic uncertainty stalled Baxter in 2022 more so than some of its peers, observes Morningstar senior analyst Julie Utterback. Perhaps more troubling for dividend-growth aficionados, the company will slow the growth of its dividend as it integrates the Hillrom deal, which negatively affected its net leverage. That being said, Utterback expects Baxter to resume growing its dividend in line with earnings once the firm hits its leverage target, and we think the stock looks cheap, trading 39% below our $67 fair value estimate.

Polaris

• Price/Fair Value: 0.64
• Morningstar Economic Moat Rating: Wide
• Forward Yield: 2.82%
• Morningstar Capital Allocation Rating: Exemplary
• Industry: Recreational Vehicles

Polaris is one of the longest-operating brands in powersports. Morningstar senior analyst Jaime Katz notes that fourth-quarter earnings disappointed and the company’s forecast for 2024 is plagued by slowing industrywide demand. We nevertheless expect Polaris to produce strong cumulative cash flow over the next five years and to continue to grow its dividend, averaging a 33% payout ratio over the next decade, she adds. This dividend-growth stock to buy trades 36% below our $145 fair value estimate.

ResMed

• Price/Fair Value: 0.68
• Morningstar Economic Moat Rating: Narrow
• Forward Yield: 1.10%
• Morningstar Capital Allocation Rating: Exemplary
• Industry: Medical Instruments & Supplies

ResMed is one of two leading players in the global obstructive sleep apnea market, and we see plenty of global growth opportunity ahead, says Morningstar analyst Shane Ponraj. The firm is in a strong financial position, and while shareholder distributions might seem low (averaging 38% of underlying net income over the past five years), we think the level is appropriate, given that the company has instead chosen to spend more on strategic acquisitions that take advantage of trends in digital health in the home-care setting, concludes Ponraj. The stock looks cheap to us as it trades 32% below our $258 fair value estimate.

Comerica

• Price/Fair Value: 0.68
• Morningstar Economic Moat Rating: Narrow
• Forward Yield: 5.73%
• Morningstar Capital Allocation Rating: Standard
• Industry: Banks—Regional

Comerica is the highest-yielding stock on our list of cheap dividend-growth stocks to buy. Comerica is largely a commercial-focused bank, with more than 90% of loans related to commercial lending, reports Morningstar analyst Rajiv Bhatia. Fourth-quarter results were decent on the surface, but we forecast profitability to worsen over the short term as net interest income continues to decline and expenses trend higher; we expect the pattern to flatten in 2024. We still expect the bank to remain profitable and to easily cover its dividend, says Bhatia. We currently assign a $73 fair value estimate to this dividend-growth stock; it’s trading 32% below that.

Eastman Chemical

• Price/Fair Value: 0.70
• Morningstar Economic Moat Rating: Narrow
• Forward Yield: 3.72%
• Morningstar Capital Allocation Rating: Standard
• Industry: Specialty Chemicals

Eastman Chemical stock is about 30% undervalued relative to our $125 fair value estimate. The global specialty chemicals company generates most of its sales outside of the US. Although Eastman reported companywide volume declines year over year during the latest quarter, we expect 2024 will show a gradual recovery, says Morningstar’s Goldstein. The company generates strong cash flows and should therefore have no trouble meeting its dividend, he adds. Notably, management’s compensation is tied to return on capital and return to stockholders.

Humana

• Price/Fair Value: 0.70
• Morningstar Economic Moat Rating: Narrow
• Forward Yield: 1.01%
• Morningstar Capital Allocation Rating: Standard
• Industry: Healthcare Plan

The final new name on our list of cheap dividend-growth stocks to buy—and the final name on the list altogether—is Humana. Humana stock is trading 30% below our fair value estimate. Management’s outlook for 2024 and 2025 came out weaker than we expected, particularly the company’s core end market of Medicare Advantage, admits Morningstar’s Utterback. The firm nevertheless maintains a strong franchise and remains at the forefront of one of the fastest-growing areas in US medical insurance. She calls the company’s dividend rate “modest” and notes that the dividend should be maintained despite weakness in near-term profit prospects. We think this dividend-growth stock is worth $500 per share.

What Is the Morningstar US Dividend Growth Index?

The Morningstar US Dividend Growth Index focuses on companies with a history of dividend growth and an ability to sustain it.

The index includes U.S.-based securities that pay qualified dividends and that have increased their dividend payments over the past five years. To gauge the sustainability of dividend growth into the future, eligible constituents must display positive consensus earnings forecasts from the analyst community and must also pay out no more than 75% of their earnings in the form of dividends. Constituents are weighted in proportion to the total pool of dividends available to investors.

Learn more about the Morningstar US Dividend Growth Index.

Dividend-Growth Stocks and Economic Moats

Morningstar thinks that companies with economic moats have significant advantages that allow them to successfully fend off competitors for decades. Such high-quality companies can carve out their moats in a variety of different ways—by having high switching costs, through strong brand identities, or by possessing economies of scale, to name just a few.

Companies that we think can maintain their competitive advantages for at least 10 years earn narrow moat ratings; those we think can successfully compete for 20 years or longer earn wide moat ratings.

Of course, companies that do not have economic moats can exhibit dividend growth. But for purposes of this article, we included only stocks that have narrow or wide moat ratings, choosing to place our bets with high-quality companies.

Cheap Dividend-Growth Stocks: More Ideas to Consider

Investors who would like to find more undervalued dividend-growth stocks to research further can do the following:

• Review the full list of stocks included in the Morningstar US Dividend Growth Index. Those dividend stocks with Morningstar Ratings of 4- or 5-stars are undervalued according to our metrics.
• Peek into the portfolios of some of the best dividend-growth-stock managers for new ideas. Some highly rated funds focused on dividend-growth stocks include Vanguard Dividend Growth VDIGX and T. Rowe Price Dividend Growth PRDGX.
• Use Morningstar Investor to build a watchlist of dividend growth stocks and create a view that allows you to easily follow the valuations, ratings, and dividend yields of the stocks on your list.