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10 Cheap Dividend-Growth Stocks to Buy

The stocks of these companies with a history of raising their dividends look undervalued heading into 2024.

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Dividend-growth stocks—those companies with a history of steady and increasing dividends over time—are lagging the broader market in 2023: The performance of the Morningstar US Dividend Growth Index is behind that of the Morningstar US Market Index by 15 full percentage points.

Why the dramatic underperformance of dividend-growth stocks? Blame this year’s narrow, tech-led stock market, 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.

In fact, 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 slowdown, a scenario many market observers expect in 2024.
  • 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 Nov. 24, 2023.

  1. Albemarle ALB
  2. Baxter International BAX
  3. Lithia Motors LAD
  4. Polaris PII
  5. Discover Financial Services DFS
  6. ResMed RMD
  7. Comerica CMA
  8. Estee Lauder EL
  9. Pfizer PFE
  10. Eastman Chemical EMN

Here’s a little bit from Morningstar analysts about each of the stocks from the list. All data is as of Nov. 24, 2023.

Albemarle

  • Price/Fair Value: 0.43
  • Morningstar Economic Moat Rating: Narrow
  • Forward Yield: 1.24%
  • 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 fourth 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. Albemarle stock trades 57% below our $300 fair value estimate.

Baxter International

  • Price/Fair Value: 0.54
  • Morningstar Economic Moat Rating: Narrow
  • Forward Yield: 3.22%
  • 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 economic 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 46% below our $67 fair value estimate.

Lithia Motors

  • Price/Fair Value: 0.54
  • Morningstar Economic Moat Rating: Narrow
  • Forward Yield: 0.74%
  • 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 the company’s 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. Third-quarter earnings disappointed, but we still view Lithia’s growth runway as excellent, he adds. This cheap dividend-growth stock trades 46% below our $500 fair value estimate.

Polaris

  • Price/Fair Value: 0.57
  • Morningstar Economic Moat Rating: Wide
  • Forward Yield: 2.87%
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Recreational Vehicles

Polaris is the first of three new stocks on our list of cheap dividend-growth stocks to buy. Morningstar senior analyst Jaime Katz notes that third-quarter earnings disappointed, marked by higher costs and lower sales—though the firm did take market share during the period. Although macroeconomic headwinds will likely persist, we find shares attractive at this margin of safety and we expect the company to continue to grow the dividend, she adds. Polaris stock is undervalued, trading 43% below our $160 fair value estimate.

Discover Financial Services

  • Price/Fair Value: 0.57
  • Morningstar Economic Moat Rating: Narrow
  • Forward Yield: 3.11%
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Credit Services

The first of two financial names on our list of cheap dividend-growth stocks to buy, Discover Financial Services fell along with many other financial stocks earlier this year in the wake of the regional banking crisis. Higher credit costs hurt bottom-line results in the third quarter, and the bank’s credit card delinquency rate bears watching, says Morningstar analyst Michael Miller. We nevertheless think the firm is in a strong financial position and boasts a solid balance sheet. Discover has made good progress in improving its funding costs by offering online savings accounts and expanding into checking. Plus, the company maintains a modest dividend payout ratio, Miller adds. While there is more uncertainty around Discover today, we still think this dividend-growth stock looks 43% undervalued.

ResMed

  • Price/Fair Value: 0.60
  • Morningstar Economic Moat Rating: Narrow
  • Forward Yield: 1.25%
  • Morningstar Capital Allocation Rating: Exemplary
  • Industry: Medical Instruments & Supplies

ResMed is the second new name on our list of cheap dividend-growth stocks to buy. The company 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 company is in a strong financial position, and while shareholder distributions might seem low (averaging 38% of underlying net income over the last 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 40% below our $258 fair value estimate.

Comerica

  • Price/Fair Value: 0.60
  • Morningstar Economic Moat Rating: Narrow
  • Forward Yield: 6.49%
  • 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 strategist Eric Compton. Third-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 cover its dividend, says Compton. We currently assign a $73 fair value estimate to this dividend-growth stock; it’s trading 40% below that.

Estee Lauder

  • Price/Fair Value: 0.62
  • Morningstar Economic Moat Rating: Wide
  • Forward Yield: 2.13%
  • Morningstar Capital Allocation Rating: Standard
  • Industry: Household and Personal Products

Estee Lauder stock is trading 38% below our fair value estimate. A leader in the global beauty prestige market with brands that include its namesake, Clinique, and Aveda, Estee Lauder is considered a preferred vendor across brick-and-mortar and digital channels. Given its brand equity and cost advantages, we assign the company a wide economic moat rating, explains Morningstar analyst Dan Su. Su expects Estee Lauder to grow dividends steadily over the next decade. We think this dividend-growth stock is worth $200 per share.

Pfizer

  • Price/Fair Value: 0.64
  • Morningstar Economic Moat Rating: Wide
  • Forward Yield: 5.38%
  • Morningstar Capital Allocation Rating: Standard
  • Industry: Drug Manufacturers—General

The final new name on our list of cheap dividend-growth stocks to buy, Pfizer stock is trading 36% below our fair value estimate. The company is experiencing a major step-down in COVID-19 vaccine and treatment sales, but we think the market is underappreciating the tail potential of these sales and the company’s next-generation drugs, observes Morningstar director Damien Conover. Conover notes that the dividend payout is about right for a more mature industry. We think this dividend-growth stock is worth $48 per share.

Eastman Chemical

  • Price/Fair Value: 0.66
  • Morningstar Economic Moat Rating: Narrow
  • Forward Yield: 3.86%
  • Morningstar Capital Allocation Rating: Standard
  • Industry: Specialty Chemicals

Rounding out our list of cheap dividend-growth stocks to buy, Eastman Chemical stock is about 34% undervalued relative to our $130 fair value estimate. The global specialty chemicals company generates most of its sales outside of the United States. Although Eastman reported companywide volume declines year over year during the latest quarter, prices held up, supporting our view that the company’s products are differentiated enough to hold pricing during a downturn, says Morningstar strategist Seth Goldstein. The company generates strong cash flows and should therefore have no trouble meeting its dividend, says Goldstein. Notably, management’s compensation is tied to return on capital and return to stockholders.

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 wide economic moats have significant advantages that allow them to successfully fend off competitors for decades. Such high-quality companies can carve out their economic 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 economic moat ratings; those we think can successfully compete for 20 years or longer earn wide economic 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 economic 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.
4 Undervalued Dividend Stocks to Buy Before It’s Too Late

Morningstar, Inc. licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar index. Morningstar, Inc. does not market, sell, or make any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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