When a company increases its dividend, that obviously means a higher payout for investors. It also often indicates financial strength, as presumably the company is earning more cash to pay for the dividend increase.
With that in mind, Morningstar has put together a list of eight undervalued stocks that recently 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,” wrote Tom Lauricella, chief markets editor for Morningstar.
“But that poor performance is opening opportunities for long-term investors to find undervalued dividend payers, including those that have been raising their payouts.”
For this list, Morningstar chose companies that have raised their dividend recently, as that can signal a company’s confidence in its future finances, Lauricella said.
Morningstar screened for stocks that increased their dividend at least 5% between July 1 and Oct. 31, eliminating any stock with a dividend yield under 2%. Among the remainder, Morningstar selected stocks that its analysts see as substantially undervalued.
That created this elite eight. Here they are, starting with the company that lifted its dividend the most:
Media, Food, RVs Lead the Way
1. Sirius XM Holdings (SIRI)
- Morningstar Moat Rating: Narrow
- Morningstar Fair Value Estimate: $7
- Recent Price: $4.63
- Recent Dividend Increase: 9.9%
- Forward Dividend Yield: 2.3%
The satellite radio company rewarded shareholders with a 10% dividend hike in October. Sirius XM dominates the satellite radio industry along with a streaming music business. It generates plenty of cash to support its capital returns program, Morningstar says.
2. McDonald’s (MCD)
- Morningstar Moat Rating: Wide
- Morningstar Fair Value Estimate: $290
- Recent Price: $267.79
- Recent Dividend Increase: 9.9%
- Forward Dividend Yield: 2.49%
The fast food giant increased its dividend by 10% in September, its 45th consecutive annual hike. McDonald’s wide moat stems from its brand power, prime real estate locations, and business scale. Morningstar sees room for more dividend growth ahead.
3. Microchip Technology (MCHP)
- Morningstar Moat Rating: Wide
- Morningstar Fair Value Estimate: $90
- Recent Price: $77.56
- Recent Dividend Increase: 7.1%
- Forward Dividend Yield: 1.91%
Microchip makes microcontroller and analog semiconductors used in thousands of products. Its September dividend increase reflects its strong competitive position and cash generation even amid an industry downturn, Morningstar says.
4. Thor Industries (THO)
- Morningstar Moat Rating: None
- Morningstar Fair Value Estimate: $139
- Recent Price: $91.32
- Recent Dividend Increase: 6.7%
- Forward Dividend Yield: 2.1%
Shares of leading recreational vehicle manufacturer Thor look cheap after falling nearly 50% from their 2021 peak. Thor caters to strong consumer demand for RVs with its portfolio of brands. Its dividend hike in August shows management’s confidence, Morningstar notes.
Utilities Offer High Yields
Utility stocks, known for their high dividends, make up the rest of the list. Rising interest rates have hit the sector this year, but Morningstar sees these names as undervalued.
5. American Electric Power (AEP)
- Morningstar Moat Rating: Narrow
- Morningstar Fair Value Estimate: $97
- Recent Price: $77.70
- Recent Dividend Increase: 6%
- Forward Dividend Yield: 4.53%
American Electric Power operates regulated electric utility networks serving 5 million customers across 11 states. It raised its dividend in October for the 17th straight year. Morningstar sees upside as AEP invests in renewable energy amid supportive state regulation.
6. Entergy (ETR)
- Morningstar Moat Rating: Narrow
- Morningstar Fair Value Estimate: $120
- Recent Price: $96.61
- Recent Dividend Increase: 5.6%
- Forward Dividend Yield: 4.68%
This New Orleans-based utility holding company gets nearly all its earnings from regulated operations. Entergy has increased its dividend annually since 1988. Its payout ratio still has room to expand, Morningstar says.
7. CenterPoint Energy (CNP)
- Morningstar Moat Rating: Narrow
- Morningstar Fair Value Estimate: $30
- Recent Price: $27.12
- Recent Dividend Increase: 5.3%
- Forward Dividend Yield: 2.95%
CenterPoint beat utility peer dividend hikes with a nearly 10% increase in January and then announced another 6% hike in October. The regulated gas and electric utility serves more than 7 million customers in 8 states.
8. FirstEnergy (FE)
- Morningstar Moat Rating: Narrow
- Morningstar Fair Value Estimate: $40
- Recent Price: $35.30
- Recent Dividend Increase 5.1%
- Forward Dividend Yield: 4.65%
FirstEnergy’s 6% dividend increase in January was its first hike since 2014. The utility holding company has transmission and distribution operations across 6 states. Morningstar sees room for more dividend growth as FirstEnergy executes its long-term capital investment program.
Dividend Investing Strategy
Dividend investing aims to deliver a stable income stream on top of long-term stock appreciation. Companies that regularly raise their dividends tend to have strong underlying businesses and solid finances.
Morningstar’s screen turned up quality dividend payers across industries that look undervalued right now. The highest yields come from the utilities, while communications, consumer defensive and consumer cyclical sectors also made the list.
Investors should conduct further research before buying any stock. But for income investors, this selection of dividend growers trading at discounts to Morningstar’s fair value estimates offers a good starting point.