Morningstar says two factors can indicate dividend-safe stocks: economic moats and distance-to-default scores.
Dividend stocks are attractive because of their regular and hopefully increasing capital gains and payments. That’s especially true at a time of stock market volatility like today.
When choosing dividend stocks, you want to stay away from companies that are likely to lower their dividends.
“Morningstar research has found that two particular factors can drive investors to dividend-safe stocks: economic moats and distance-to-default scores.” writes Morningstar investment specialist Susan Dziubinsky.
“Firms with economic moats have significant competitive advantages and can successfully maintain their profits and fend off competitors.”
As for the distance to default, “it measures the strength of the balance sheet and the probability of bankruptcy,” he explained.
Morningstar cites three broad-spectrum companies with strong balance sheets and favorable distance-to-default scores that are trading below their fair value estimates. “We think of them as top-selling dividend stocks,” Dziubinski said.
Comcast (CMCSA) – Get a free report: Morningstar analyst Michael Hodel puts the fair value of the media and telecommunications giant’s shares at $60. It recently traded at $37.85. Dividend yield: 2.97%.
“Comcast’s core cable business enjoys significant competitive advantages but is likely to experience slow growth as competition for incremental customers increases,” he wrote in a commentary.
“NBCUniversal is not as well positioned, but it does have unique assets, including core content franchises and theme parks, that should help ease the transition from the traditional TV business.”
So, “overall, we expect Comcast to deliver modest growth with strong cash flow for the foreseeable future,” Hodel said. “Comcast will continue to be the dominant broadband provider in many parts of the country.”
International Flavors and Fragrances (IFF) – Get a free report: Morningstar analyst Seth Goldstein estimates the fair value of the specialty ingredients maker’s stock at $140. It recently traded at $93.70. Dividend yield: 3.36%.
The stock has underperformed since early 2022. “We view the current price as an excellent opportunity for long-term investors to purchase shares,” Goldstein wrote.
“The market is concerned that cost inflation will continue to hurt earnings and is skeptical of management’s long-term growth strategy.”
But, “we see little long-term impact from cost inflation,” Goldstein said. “In addition, we believe that management’s long-term growth strategy is likely to succeed. The plan to invest in businesses with limited capacity will allow IFF to increase volumes above the industry rate.”
Western Union (WU) – Get a free report: Morningstar analyst Brett Horn puts the fair value of the money transfer company’s shares at $18. It recently traded at $13.40. Dividend yield: 6.8%.
“Western Union continues to experience revenue declines as it struggles through difficult conditions,” he wrote in a comment.
“And the company is likely to remain under pressure into 2023 as management invests in a bid to stabilize and grow the business.”
Looking ahead, “we continue to view the performance of the company’s digital business as critical,” Horn said.
“The key to maintaining the company’s competitive position is its ability to sustain its share in the face of an industry shift in this direction. On that front, there were some encouraging signs” in the fourth quarter, he said.
