10 Cheap Dividend Stocks to Buy Now: Morningstar

Start Slideshow

Investors searching for stocks with durable — safe — dividends should look for companies with management teams that support their dividend strategies, according to David Harrell, editor of Morningstar DividendInvestor. They should also examine a company’s payout ratio, and favor companies with competitive advantages, or economic moats.

“A moat rating does not guarantee dividends, of course, but we have seen some very strong correlations between economic moats and dividend durability,” Harrell said in a new blog post by Morningstar.com’s senior product manager Susan Dziubinski.

Dan Lefkovitz, a strategist for Morningstar Indexes, added that “distance to default” is another useful health-screening tool for dividend payers. This measure of balance-sheet strength uses market information and accounting data to determine how likely a firm is to default on its liabilities.

“We found that the wider the economic moat and the better the distance to default score, the less likely for a firm to cut its dividend,” Lefkovitz says.

Dziubinski suggested that at this time of economic uncertainty and market volatility, investors might consider adding cheap, quality dividend stocks to their portfolios.

“Quality companies have the financial stability to maintain their dividends during questionable economic periods, and price risk is reduced when investors can buy the stocks of these companies for less than what they’re worth,” she wrote.

To find undervalued stocks with safe dividends, analysts turned to the Morningstar Dividend Yield Focus Index, a subset of the Morningstar U.S. Market Index, which represents 97% of equity market capitalization.

Only securities whose dividends are qualified income are included in the index; real estate investment trusts are removed. Companies are then screened for quality, using the Morningstar Economic Moat and Uncertainty ratings. The index includes a screen for financial health using a distance-to-default measure.

The 75 highest-yielding stocks that pass the quality screen are included in the index, and constituents are weighted according to the total dividends paid by the company to investors.

See the gallery for 10 dividend stocks from among the index’s constituents. They are also cheap, and were trading well below analysts’ fair value estimates as of Feb. 10.