3 Cheap Dividend Stocks to Buy With Growth Potential

Susan Dziubinski: Hi. I’m Susan Dziubinski for Morningstar. As of this taping, utilities stocks have fallen 25% since August 2022. What’s going on?

The increasing probability of higher-for-longer interest rates has caught up to utilities. With the 10-year U.S. Treasury yield reaching levels we haven’t seen in more than 15 years, the dividend yields on utilities stocks are less attractive. In fact, the sector’s dividend yield has been lower than the yield on the 10-year U.S. Treasury since last August.

Nevertheless, Morningstar thinks that this falloff in the prices of utilities stocks provides investors with a rare opportunity to buy high-quality utilities at attractive prices—in fact, the sector hasn’t looked this cheap since 2009. Morningstar thinks the fundamentals of utilities are strong, offering better growth prospects, improving rate regulation, and less-volatile earnings than they have in their history. We’re forecasting 6% annual earnings per share and dividend growth, on average, among the U.S. utilities we cover.

Today, we’re looking at three of Morningstar’s top picks in the sector for the fourth quarter. We think these companies can grow earnings and dividends faster and for longer than their current stock prices suggest.

3 Cheap Dividend Stocks to Buy With Growth Potential

1. Entergy ETR
2. NiSource NI
3. Duke Energy DUK

Our first cheap dividend stock pick in the utilities sector is Entergy ETR. Morningstar thinks Entergy offers one of the most attractive combinations of yield, growth, and value in the sector. Above-average electricity demand growth, clean energy investments, and reliability and resiliency network investments are core growth drivers for the firm. Entergy also should benefit from industrial carbon emissions cuts, global energy demand, and green hydrogen development. We assign the company a narrow economic moat rating, thanks in large part to the constructive regulatory environment in which it operates. We’re expecting annual earnings growth of 7% and think shares are worth $120.

Our next cheap dividend stock pick in the utilities sector is NiSource NI. We think NiSource has one of the longest runways of growth in the sector: In fact, the firm’s transition from fossil fuels to clean energy in the Midwest supports at least a decade of growth potential. We expect NiSource to invest $15 billion over the next five years and as much as $30 billion during the next 10 years, leading to 7% earnings growth and similar dividend growth. It plans to close its last coal-fired power plant in 2028 and add wind, solar, and energy storage. We assign NiSource a narrow economic moat rating and think shares are worth $33.

Our last cheap dividend stock in the utilities sector is Duke Energy DUK. After divesting its renewable energy business, Duke has a clear pathway to achieving management’s 5%-7% annual earnings growth target. Duke’s $65 billion capital investment plan for the next several years is focused on clean energy and infrastructure upgrades to reduce carbon emissions. New legislation in North Carolina supports the clean energy transition, while Florida offers opportunities for solar growth. While Duke’s yield is among the highest in the sector, we expect dividend growth to lag earnings growth until the company’s payout ratio comes down. We assign the company a narrow economic moat and think shares are worth $105.

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Morningstar strategists Andy Bischof and Travis Miller contributed the research behind this segment.

Watch “3 Undervalued Stocks for Beginners” for more from Susan Dziubinski.