10 Top Dividend Stocks for 2024

David Harrell: Hi. I’m David Harrell, editor of Morningstar’s DividendInvestor newsletter, and I’m joined once again by Dave Sekera, who is Morningstar’s chief US market strategist.

Dave, thanks for being here.

David Sekera: Of course. Good to see you, David.

Harrell: We spoke back in January, and we discussed US equity market performance in 2023, and you also shared your 10 dividend picks for 2024. I wanted to revisit those picks as well as any new ones you might have. But before we do that, can we talk about market performance in 2024, both the overall market and dividend-payers specifically?

Sekera: Of course. So, dividend stocks have actually had a pretty good year thus far this year. Year-to-date, the Morningstar US Dividend Composite Index is up a little bit over 9%. So pretty good year for only being halfway through the year. Now, of course, that still trails the broad market average, which is up, I think, almost 14% year to date. Now, of course, the differential between that is AI stocks. I mean, really, the focus thus far this year has been on anything artificial intelligence. Those stocks have continued to surge, pull the broad market up much further than the dividend-paying stocks.

Now, having said that, we do think that the market is starting to get slightly overvalued here, trades at about a 3% to 4% premium over a composite of the fair values of the stocks that we cover. But when you break them down, you do still see some opportunities in today’s marketplace. Now, core stocks and growth stocks are overvalued, trading at about 6% and 7% premiums, respectively. And of course, that’s where you’re going to find all of those AI stocks. Whereas value stocks have definitely lagged the broad market. So, value stocks are still trading at about a 9% discount to a composite of our fair values. So, we see a lot of opportunities in the value space, which is of course where we also see a lot of those dividend-paying stocks. It’s interesting, too, right now, I think about two thirds of the market performance this year is really based in only 10 stocks. And in fact, if you look at Nvidia—Nvidia just in and of itself accounts for, I think, about 25% of the market return thus far this year.

10 Top Dividend Stocks for 2024

1. Kraft Heinz KHC
2. Realty Income Trust O
3. Healthpeak DOC
4. U.S. Bank USB
5. WEC Energy WEC
6. Entergy ETR
7. Verizon Communications VZ
8. Energy Transfer ET
9. Clorox CLX
10. Johnson & Johnson JNJ

Harrell: Can we run down your dividend picks from January and get your current take on each of them, and maybe start with Gilead? Because I know that’s probably the worst performer so far in 2024.

Sekera: Yeah, it’s been a disappointing year thus far for Gilead. Now, the performance of the company has actually been in line with our own expectations from our equity research team but does appear that the market has been disappointed by relatively modest growth at the company. So, we have seen the stock sell off.

Now having said that, from a dividend point of view, we’re still comfortable that the company will be able to maintain its dividend. I think its dividend payout ratio is only about 50%. But with the market action, I think it’s going to be one of those stocks that maybe is going to be more volatile than what we initially had thought going forward. At this point, it might be a little bit more appropriate, more for value investors who are looking for those stocks trading at pretty deep discounts to fair value as opposed to dividend investors who are really looking just for that dividend income. So again, I do think the dividend income there, you’re going to be fine. We’re not expecting any kind of cuts in that dividend, but I do think it’s going to be a more volatile situation going forward than what we originally expected.

Harrell: So, this might be one that you swap out for a new pick.

Sekera: It could be, depending on your tax situation, yes.

Harrell: And what else has disappointed so far in 2024?

Sekera: I’ve been disappointed in the price action at Kraft Heinz stock. That one has sold off a bit thus far this year as well. Now, this is one that really shows our view and our differential in our view versus the market. So, we actually upgraded our economic moat rating on Kraft Heinz this year to narrow from none. And of course, that means that we expect the company will be able to generate excess returns on invested capital for at least the next 10 years. And a large reason of that is because the company has really changed their strategy over the past five years, really going back to focusing on building long-term economic value as opposed to their prior strategy where they were prioritizing short-term profits. So, at this point, it’s a 5-star-rated stock, trades at about a 40% discount from our fair value, and pays a pretty healthy dividend yield of about 5%.

Harrell: I believe real estate is currently the most undervalued sector. And you had a couple of picks from the sector back in January. How have those fared in 2024?

Sekera: They’ve been under pressure thus far this year. Now, real estate in and of itself is still the most hated asset class on Wall Street. So, we’ve seen that sector actually sell off this year. It’s the only sector that has a negative return year to date. Now, when I take a look at these two individual stocks, we’re still pretty comfortable with the fundamentals on both of them.

So, the first is Realty Income Trust. It is a stock that we think has pretty good defensive characteristics. It’s a triple net lease provider, which means that it can actually flow through to its tenants its own inflationary cost increases. So even if inflation were to make a comeback later this year or into next year, I think that one has got some good cushion there as well. But it’s a 5-star-rated stock, trades at about a 30% discount from fair value, and pays a nice healthy 6% dividend yield. So, this is the one that’s going to be the most correlated of our real estate coverage with interest rates. So, our US economics team does expect interest rates to continue to keep coming down. They’ve been coming down here in the short term, but second half of the year and going into next year, they’re looking for lower 10-year yields. So that should be a good tailwind for all of real estate, but specifically, this stock.

The other one is Healthpeak. Now again, another stock that we consider to have good defensive characteristics. They are a real estate investment trust that mostly is invested in medical offices and research facilities. Again, fundamentally, we think this company is doing just fine. So even with the stock being a little bit under pressure from the higher interest rates now as compared to the beginning of the year, we’re not concerned from a fundamental point of view. Again, another 5-star-rated stock, trades at a very deep discount from intrinsic value. I believe this one also has about a 6% dividend yield.

Harrell: Great. Now, last year, we saw some of the bank stocks sell off following the bankruptcy of Silicon Valley Bank. And you had a couple of picks from the sector. How have those fared in 2024?

Sekera: So, it’s going to depend on the individual banks. So, with U.S. Bank, that was our pick last year. We’ve seen some increases in loan-loss reserves, some increases in defaults. And I think the market is a little bit skittish as far as how much those might increase. I know our economics team is looking for increase in default rates and for loan-loss reserves, but really only going back more toward historically normalized levels. We’re not looking for them to surge higher, which is what I think the market is concerned about right now. So, U.S. Bank still looks attractive to us. It’s got a wide economic moat. I think it’s the only regional bank that we assign a wide moat to. Stock is a 4-star-rated stock, trades at about a 20% discount to fair value and has a 5% dividend yield.

The other one is Truist. Again, that’s going to be a pretty similar story. Just looking at their funding costs still being relatively elevated here in the short term. We along with a lot of other people actually expected the Fed to start cutting interest rates by now. Our base case right now is we’re looking for the Fed to start cutting here in September. Once that starts to happen and it brings down some of their short-term funding costs, I think that will give a good tailwind to that stock. It’s currently trading at a 4-star level as well, also a 20% discount to fair value, and has about a 5.5% dividend yield.

Harrell: Now, utilities obviously are a fertile ground for dividend investors. And you’ve been bullish on the sector since late last year, I believe. How have your picks there fared?

Sekera: Pretty well. Now interestingly, WEC has not performed nearly as well as I would have thought it would have performed. I think this is going to be an interesting opportunity for dividend investors to take a look at. So, WEC, the old Wisconsin Electric, actually is probably one of the better plays as far as looking at the increase in electric demand for artificial intelligence. AI computing, of course, takes multiple times more electricity than traditional computing. And what we see is there’s a number of different data centers that are currently in construction in Wisconsin right now. So, we do think that that’s going to help give that company a good tailwind for growth over the next couple of years. So that’s one I would take a look at if you’re looking to play that increase in demand for electricity. It’s currently a 4-star-rated stock, trades at a 17% discount to fair value, has a 4.25% dividing yield.

And then the other utility stock, which I think is also one of our picks on our equity research team, is Entergy. That’s one where we just think it has the best combination of potential growth characteristics, good management, strong regulatory regime. It’s also a 4-star-rated stock, at a 15% discount, pays about a 4.2% dividend yield today.

Harrell: Great. And I think on WEC, Microsoft recently announced a new project there as well in Wisconsin. So…

Sekera: Yeah. Well, those northern states definitely have an advantage as far as being able to build those at data centers, because of course one of the biggest costs for data centers is keeping it cool. So, in those northern states, especially in the wintertime, it’s a lot more effective to keep them cool than in some of the southern states.

Harrell: Let’s switch over to communications. I know you’ve recommended Verizon for a while. How has Verizon been performing in 2024?

Sekera: It’s been performing pretty much in line with our expectations. That’s really one that had been both a pick from a valuation perspective as well as a dividend perspective. It’s still a 4-star-rated stock, trades at a 24% discount to fair value, and about a 6% dividend yield, so quite attractive. Really, I think what the biggest difference in our opinion versus the market on that one is that we do expect over time that the wireless segment will start to act more and more like an oligopoly, meaning that they will compete less on price. So that’s going to allow their margins to increase over time. And looking at the results over the past couple of quarters, I think we’re starting to see that.

Harrell: And if we switch over to energy, I know there was some news for Equitrans, which was one of your picks back in January.

Sekera: Yeah, this actually turned out really well for investors on this one. Essentially, it is getting bought out. So, we saw that stock really just surge right up toward our fair value estimate. On that one, I think it’s up well over 30% from when we first started recommending it. So, at this point, it’s probably now a good time to actually move out of that sock—I think the value has been captured there—and probably look for other dividend opportunities to be able to reinvest into.

Harrell: And I know you have several new picks for the second half of 2024. Could you share those and maybe give your rationale for them?

Sekera: The first one is Energy Transfer, and really, this is really a swap idea for Equitrans. Energy Transfer is a 4-star-rated stock, trades at a 24% discount, and a 6% dividend yield. It is also a pipeline company with storage facilities as well for LNG, natural gas, and oil. So, I do like this one as fitting into that energy section within your portfolio.

Harrell: And I believe your other two picks are names that investors are definitely going to be familiar with.

Sekera: The first one is Clorox. Now, this is a really good example, I think, of how the market over time often acts like a pendulum and can swing too far in one direction or the other. So, of course, with Clorox, early during the pandemic, Clorox wipes were like gold. That stock surged. And in fact, it didn’t just surge, it ran up so much that it actually got all the way up into 1-star territory at that point in time. Now, of course, they’ve also had a difficult time, I think, beginning in 2022, being able to put through their own inflationary cost increases through to their customer base. So, we started to see margins getting squeezed, and of course, sales also were slowing down at that same point in time. So that stock had been then on a multiyear decline, and it looks like it bottomed out maybe fall of last year.

Looking forward, when I look at our model, we’re really only looking for relatively modest growth on the top line. We are looking for them to be able to continue keep putting through some of those costs increases over the next couple of years, get back toward more of those historical normalized operating margin type levels. So, I think this is a good one for dividend investors, especially patient investors to take a look at. It’s a 4-star-rated stock, trades at a 20% discount to fair value, has a 3.5% dividend yield.

Then the other one in the healthcare sector is Johnson & Johnson. Now, I always look at Johnson & Johnson as being a core holding type of stock, wide economic moat, Low Uncertainty Rating. I think everyone is pretty familiar with Johnson & Johnson. The story here is that they do have some competition coming this summer in the biosimilar market for one of their patented drugs, which is going to be losing its patent. But when we look at their research and development pipeline and we look at new products and when we think they’re scheduled to start coming out, we think that they’re going to have enough top-line growth to be able to make up for that additional competition. So again, it’s a stock not at huge discount from fair value, but this is one where it’s pretty rare to find it trading at much of a discount. I think it’s about a 10% discount, just enough to put it in 4-star territory today.

Harrell: That’s great, Dave. Thank you for sharing your insights. It’s always good to have you here.

Sekera: Of course. Thank you, David.

Harrell: I’m David Harrell from Morningstar. Thanks for watching.

Watch The 10 Undervalued Dividend Stocks for 2024 for more from this series.