The 10 Undervalued Dividend Stocks for 2024

David Harrell: Hi. I’m David Harrell, editor of Morningstar DividendInvestor newsletter, and I’m here with Dave Sekera, Morningstar’s U.S. chief market strategist.

Dave, thanks for joining me.

David Sekera: Well, thank you. Always good to see you, David.

Harrell: Well, belated happy new year. 2023, excellent year for the overall U.S. equity market. But something of a reversal from what we saw in 2022 for dividend stocks. That year, dividend stocks had a stronger relative performance, but in 2023, a weaker relative performance to the overall equity market.

Sekera: A weaker performance relative to the overall market, but actually not that bad of a year in and of itself. So, if you look at the Morningstar Dividend Composite Index, it’s still up about 11% for the year. Now, of course, the broad Morningstar US Market Index was up, I think, over 26%. But of course, a large portion of that is because of those “Magnificent Seven” stocks. So, if you look at an attribution analysis, half of the total market return was just from those seven stocks alone, of course, those stocks not being high-dividend-paying stocks. So overall, it really wasn’t that bad of a year for the dividend-payers.

Harrell: So, when I look at your analysis of the U.S. market right now, you’ve written that the overall market is roughly in line with fair value estimates from Morningstar equity analysts. But when we look at the Morningstar Style Box, we’re seeing lower valuations on the value side, or the value column, and that’s where we find many dividend-payers.

Sekera: Exactly. So, if you look at our present values right now, the price/fair value of the broad market, as you mentioned, is pretty much right at fair value right now. But when you break it down, value stocks are still trading at about a 10% discount to our fair value. So, we see a lot of opportunities in that space today. It’s in fact one area that we do think investors should be looking to overweight today, whereas core stocks and growth stocks are both trading pretty full at this point, just right at or a little bit ahead of fair value. So again, that value space, a lot of dividend-payers in there, still very attractive.

The 10 Undervalued Dividend Stocks for 2024

1. Verizon Communications VZ
2. Equitrans ETRN
3. U.S. Bank USB
4. Truist TFC
5. Realty Income O
6. Healthpeak PEAK
7. Entergy ETR
8. WEC Energy WEC
9. Gilead GILD
10. Kraft Heinz KHC

Harrell: So, let’s talk about specific names. I believe several of them that you’ve brought today are ones we actually spoke about in the middle of last year when we last sat down.

Sekera: Yeah. So, the first one is going to be Verizon Communications. It’s a 4-star-rated stock. It’s a company that we rate with a narrow economic moat. Still trading at pretty attractive levels. It had a good year last year. It was a 5-star-rated stock, but now it’s only a 4-star. But I still think that it’s very attractive for investors today. Still has about a 6.6% dividend yield. And when I think about Verizon, I think one of the biggest reasons why we think it is undervalued is because we do expect there to be a change in how the wireless segment operates. So, I spoke to Mike Hodel, who is the equity analyst that covers that name, and just due to a couple of different shifts in that industry, he thinks that the wireless business in and of itself is going to start acting more like an oligopoly.

Harrell: A handful of players dominating the market.

Sekera: Exactly. So, they’re going to compete less on price going forward. And so, he is looking for some margin improvement, which will end up helping out Verizon over time. In the meantime, collecting a pretty heavy dividend yield. And at the same point in time, Mike doesn’t really think or doesn’t have much concern about them cutting the dividend yield.

The other one is going to be Equitrans in the energy sector. And I think we’ve actually talked about this one a couple of times. It was really, really undervalued a year ago. Again, it’s moved up. It’s now a 4-star-rated stock, another company we do rate with a narrow economic moat. Trades, I think, at about a 30% discount to fair value right now. So again, still a really good margin of safety and another stock that pays well over a 6% dividend yield today. Now there’s a lot of concern in the marketplace about some of their pipelines, specifically, the Mountain Valley Pipeline. But I think when you look at our valuations today, and I spoke to our equity analyst there, in his view, the way the market is pricing that stock, he doesn’t think that the market is giving them any value for that project whatsoever. So again, we do think there’s some pretty good upside there.

Harrell: Now, U.S. banks had a fairly rough year, particularly some of the regional banks. When you look at that industry, what’s standing out to you right now?

Sekera: There’s a number of different names there. One that we’ve talked about last time was U.S. Bank. And again, that’s still the largest of the regional banks. It’s the one that we’re most confident that they’ve got the ability to handle some of the deposit loss that we saw last year. 4-star-rated stock, trades at a 15% discount, but it’s also one of the few regional banks that we also do rate with a wide economic moat. So, I think that one is a good one to take a look at for investors.

And for investors who are looking maybe for a little bit more risk but higher potential return, the other one I’m going to mention is Truist. So, it’s also a 4-star-rated stock. We rate the company with a narrow economic moat. It trades at a 25% discount to fair value. It’s dividend yield right now is 5.5%. So, part of the attraction to that stock right now, at least for me, is that it does have a very large loss in its hold-to-maturity portfolio. And so, it will take time for that company to be able to earn its way out of those losses. But we do think that interest rates will end up coming down this year and next. So, if we are right about our forecast in interest rates coming down, this action is going to be very levered to that because, of course, as interest rates come down, those hold-to-maturity losses in that portfolio will subside as those prices go up.

Harrell: I know that’s a bank that had its challenges last year. It did not raise its dividend in 2023, but it was able to maintain its dividend rate last year.

Sekera: Yeah. And I talked to our equity analyst team on that one. And at this point, based on our model, we do think that they’re going to be able to maintain their dividend.

Harrell: You were talking about interest rates, and they’ve stabilized, some analysts are predicting rate cuts for 2024 already. I wanted to look at maybe a couple of the sectors that were pressured by interest rates last year, and one being real estate investment trusts, which are often a large component in many dividend-focused portfolios. What are you finding attractive there right now?

Sekera: Yeah, I do think interest rates as they come down are going to provide a very good tailwind for the real estate sector. Now, of course, the real estate sector itself last year was under a lot of pressure, specifically commercial real estate. And really that was brought about because urban office valuations were just generally considered to be too high. As that sold off, it really kind of brought down the entire real estate sector. So, we found a lot of opportunities where things were just being unfairly punished because of that broad market downshift.

Now, two that I’m going to bring up here are going to be a little bit different. So, the first one is Realty Income. It’s a triple-net lease provider. It’s a 5-star-rated stock. Now, we do rate it with no economic moat, but in most of the real estate names, we don’t assign moats there. So that’s not going to be surprising. Trades at a 22% discount to fair value. Now, our equity analyst team took a look at our entire REIT coverage, and they’ve actually modeled that against interest rates. And what they found is that this name has the highest correlation to interest rates over time. And so, as interest rates come down, this is one that we think actually has the best upside leverage to that shift in interest rates.

Now, one that’s going to be a little bit more defensive is going to be Healthpeak. And as the name implies, it’s going to be defensive. It is in the healthcare sector, mostly medical office buildings, some other diversified healthcare assets as well. It’s a 5-star-rated stock, trades at a 40% discount to our fair value. And at this point, you’re capturing over 6% dividend yield.

Harrell: And I’ll just point out, Realty Income also pays a monthly dividend, which is different than most of the REITs, which are generally quarterly.

Sekera: Yeah. So, depending on the kind of income stream that you’re looking for, that might be of interest as well.

Harrell: Another area of the market, certainly, that’s very rate-sensitive is utilities. Utilities had pretty rough 2023 as well. But again, valuations there are looking more attractive. What names are standing out to you right now?

Sekera: Yeah, the utilities sector really got hammered in September and October, specifically. And if you look at interest rates, that’s when the 10-year was shooting up. In fact, it almost hit 5% at that point in time. And the utility sector sold off very hard. In fact, it got down to valuations that, I believe our team said that according to our numbers, their valuations were as low as they’ve seen since the global financial crisis in 2008 and 2009. Now, a lot of those names have recovered, but we still see a number of names that are lagging to the upside that do have a lot of potential for dividend investors.

So, the first one is going to be Entergy. It’s a 5-star-rated stock. We rate the company with a narrow economic moat. Trades at a 13% discount to our fair value, pays about a 4.0%-4.3% dividend yield today. And this is the one where it’s just kind of our go-to name in the utilities sector today. According to our team, it just has the best combination of value, growth, and long-term potential.

The other new one is WEC Energy. So that’s a 4-star-rated stock. Again, narrow economic moat, trades at about a 10% discount to fair value, pays about a 4% dividend yield today. And our team likes that one. They think it’s got best-in-class management. It has probably some of the better growth prospects in the utilities sector. And looking forward, they actually think it’s a very constructive regulatory environment that it operates in.

Harrell: So, let’s wrap up by taking a look at the more defensive area of the market, stocks in the healthcare or consumer defensive sectors. What’s looking attractive to you there?

Sekera: In the healthcare sector, I still like Gilead. So, it’s a name that we talked about last time. It’s rated 4 stars, trades at about a 14% discount to our fair value, pays a 3.6% dividend yield today. And this is one where our equity analyst team, one, we just think that the equity market underappreciates the strength of their HIV product portfolio line. But when we also look at the company’s pipeline and we look at some of their oncology products, we think the market isn’t giving them enough credit for that as well. So, I do think that’s an interesting one for investors. Again, go to Morningstar.com and read all about it before you invest in it. But I do think that’s an interesting one.

And then in the consumer defensive sector, actually, I like Kraft Heinz. That’s a 5-star-rated stock. Now we don’t rate it with an economic moat, but at a 28% margin of safety from its intrinsic value, I think it’s a good one for investors to take a look at. A 4.2% dividend yield, so again, pretty healthy yield compared to a lot of the other names in that sector. A couple of things going on there. Just the food names in general have been under pressure over the past year. A lot of the food companies have had a hard time bringing up pricing as fast as their own costs have gone up. So, they’ve seen some margin compression in the short term. Longer term, as inflation moderates this year, we do think they get that pricing back. And so, we should see some of their margins continue to move back up toward historical norms. And as that happens, I think that’s going to give a good tailwind to that stock.

Harrell: Sounds good. Well, Dave, thanks for your insight. It’s great having you here as always.

Sekera: Well, thank you. I appreciate it.

Harrell: I’m David Harrell with Morningstar DividendInvestor. Thanks for watching.

Watch “Where to Find Stocks to Buy in 2024″ for more from David Sekera.