8 Undervalued Stocks That Just Increased Their Dividends

Since the stock market’s gains this year have been powered by just a handful of big-name technology stocks, many dividend-paying stocks have lagged.

But that poor performance is opening opportunities for long-term investors to find undervalued dividend payers, including those that have been raising their payouts.

Dividend investing comes in various forms. Investors can look for stocks that offer the highest yields, names with a history of stable dividend payouts and strong finances, or companies that are raising dividends.

For this article, we screened for stocks that have increased their quarterly dividends, which can be a sign of a company’s confidence in its future finances. We combined this screen with one for stocks that are trading below their Morningstar fair value estimates, meaning they have attractive prices for long-term investors. These stocks offer investors the potential to benefit from both increased dividend yields and the possibility that their investment values will grow.

Screen: Undervalued Dividend Stocks With Higher Payouts

We started with the 672 U.S.-based companies covered by Morningstar and looked for names that pay a quarterly dividend to investors. We then tracked changes between any dividends declared during the third quarter of 2023 and the end of October.

From there, we filtered for companies that saw a dividend increase of 5% or more to capture the most substantial changes. Stocks with dividend yields under 2% were then excluded from the group. After that we picked companies considered undervalued by Morningstar analysts, meaning they are rated 4 or 5 stars.

In all, there were eight undervalued companies with dividend increases of more than 5% that made it through.

We excluded one stock that otherwise would have made the list: WestRock WRK, which in September announced a merger with Smurfit Kappa. Morningstar analyst Spencer Liberman notes that Smurfit also pays a dividend, but it is unclear what the dividend of the combined company will look like.

Here are the five stocks with the largest dividend increases of the group, along with their outlooks from Morningstar analysts. The full list of eight stocks is at the bottom of this article.

• Sirius XM Holdings SIRI
• McDonald’s MCD
• Microchip Technology MCHP
• Thor Industries THO
• American Electric Power AEP

Sirius XM Holdings

• Fair Value Estimate: $7.50
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium
• Forward Dividend Yield: 2.5%

“There is still room for digital transition in advertising, especially in the audio medium, as shown by Sirius XM’s third-quarter results. Advertising revenue growth in Pandora and off-platform, the firm’s streaming segment, mostly offset the continuing weakness in overall broadcast audio advertising, which contributed to a slight decline in the Sirius XM segment revenue. While Sirius XM platform subscribers declined slightly, the increase in trial funnel listeners from last year (albeit with no change from the previous quarter) indicates a slowdown in subscriber losses. We expect this to continue, which, with increasing streaming advertising revenue, bodes well for Sirius XM. Management maintained its full-year revenue, adjusted EBITDA, and free cash flow guidance.”

Read more of Ali Mogharabi’s outlook for Sirius XM stock.

McDonald’s

• Fair Value Estimate: $290.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low
• Forward Dividend Yield: 2.6%

“McDonald’s continues to prove resilient despite widespread consumer pressure, with its strong value positioning, investments in core menu development, and digital acuity driving another quarter of healthy top-line performance. The firm’s $6.69 billion in sales and $3.17 in diluted earnings per share comfortably edged our respective estimates of $6.29 billion and $2.70, with nearly 9% global comparable store sales growth attesting to broad-based strength across the firm’s 115-plus global markets. We expect to pull down our 2024 comparable store sales estimates by a couple of points across regions as the competitive environment intensifies, with competition for the breakfast daypart—roughly 25% of McDonald’s sales—and for lower-income clientele remaining intense. Shares strike us as attractive.”

Read Sean Dunlop’s take on McDonald’s stock.

Microchip Technology

• Fair Value Estimate: $90.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium
• Forward Dividend Yield: 2.5%

“Microchip Technology reported decent fiscal 2024 second-quarter results, but guided to its worst sequential revenue decline in at least a decade, and likely since the credit crisis. We don’t believe business conditions have deteriorated to levels seen during that panic. We attribute the revenue shortfall to inventory digestion after a couple of years of tremendous growth, as customers rushed to place orders with Microchip (many of which were part of its non-cancellable customer program). While we expect this inventory correction to dampen results in the near term, we consider Microchip to be particularly adept at navigating industry cycles, and we often find downturns to be attractive buying opportunities for patient investors with a long-term time horizon …. and we view the shares as undervalued.”

Read more of Brian Colello’s outlook for Microchip Technology stock.

Thor Industries

• Fair Value Estimate: $139.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High
• Forward Dividend Yield: 2.2%

“We have initiated coverage on recreational vehicle manufacturer Thor Industries with a no-moat rating and a fair value estimate of $139 per share. Thor is the world’s largest RV manufacturer, with a market share of over 40% in North America for both motorhomes and towables and a market share of over 20% in Europe, generating more than $11 billion in sales in fiscal 2023. The company boasts a portfolio of over 30 brands, most notably Airstream and Tiffin. For fiscal 2023, North America accounted for over 72% of sales and Europe accounted for over 27% of sales.”

Read David Whiston’s outlook for Thor.

American Electric Power

• Fair Value Estimate: $97.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Low
• Forward Dividend Yield: 4.7%

“We are reaffirming our $97 per share fair value estimate after American Electric Power reported third-quarter operating earnings of $1.77 per share, compared with $1.62 in the same year-ago period. The company narrowed its full-year guidance range to $5.24-$5.34 from $5.19-$5.39. Increasing our full-year estimate to within the narrowed range will not affect our fair value estimate. AEP trades at a 21% discount to our fair value estimate, making it one of the cheapest U.S. utilities we cover. However, we think closing that valuation discount will take time as AEP works to narrow the gap between earned and allowed regulatory returns and executes its capital investment plan while managing its balance sheet. AEP’s 4.6% dividend yield is a 70-basis-point premium to the group.”

Read more of Andrew Bischof’s outlook for AEP here.

Eight Undervalued Stocks With Dividend Increases