Dividend-growth stocks—those companies with a history of steady and increasing dividends over time—have lagged the broader market lately: The US Dividend Growth Index has underperformed the US Market Index by 14 full percentage points over the trailing one-year period.
Why the dramatic underperformance of dividend-growth stocks? Blame the narrow, tecnology-led stock market during much of that time, says Dan Lefkovitz, a strategist with Indexes. “Dividend-payers may lag during market environments led by hot growth stocks, but in down periods like 2022 and 2018, they show resilience,” he observes.
Dividend-growth stocks have three things going for them today:
- Companies with growing dividends tend to be profitable and financially healthy, two valuable qualities during periods of economic uncertainty.
- Such companies are also more likely to have competitive advantages that may allow them to pass along price increases and thereby maintain margins during inflationary times.
- Dividend-growth stocks tend to be less volatile than the overall stock market and are therefore attractive investments for playing a little defense.
To uncover some cheap dividend-growth stocks to investigate further, we’re turning to the US Dividend Growth Index.
10 Cheap Dividend-Growth Stocks to Buy
These stocks from the US Dividend Growth Index have increased their dividend payments over the past five years, pay out no more than 75% of their earnings in the form of dividends, possess competitive advantages (as measured by the Economic Moat Rating), and were trading at among the widest discounts to our fair value estimates as of March 1, 2024.
Albemarle ALB
FMC Corp. FMC
Sirius XM Holdings SIRI
Lithia Motors LAD
Baxter International BAX
Polaris PII
ResMed RMD
Comerica CMA
Eastman Chemical EMN
Humana HUM
Here’s a little bit from analysts about each of the stocks from the list. All data is as of March 1, 2024.
Albemarle
- Price/Fair Value: 0.48
- Economic Moat Rating: Narrow
- Forward Yield: 1.12%
- Capital Allocation Rating: Standard
- Industry: Specialty Chemicals
Albemarle tops our list of cheap dividend-growth stocks—but its forward yield is among the lowest on our list, serving as a reminder that dividend-growth stocks aren’t necessarily high-yielding stocks. One of ’s top lithium picks, Albemarle is among our analysts’ favorite 33 undervalued stocks for the first quarter. strategist Seth Goldstein expects lithium demand to more than triple by 2030, providing Albemarle with solid dividend growth potential ahead; we forecast earnings to average around 30% of net income over the next five years. In early March, the company announced a surprise plan to issue convertible preferred shares; depending on the terms of the offering, which have yet to be announced as of this writing, we may adjust our fair value estimate. Albemarle stock trades 52% below our current $300 fair value estimate.
FMC Corp
- Price/Fair Value: 0.52
- Economic Moat Rating: Narrow
- Forward Yield: 4.05%
- Capital Allocation Rating: Standard
- Industry: Agricultural Inputs
The first of three new names on our list of cheap dividend-growth stocks to buy, FMC is a pure-play crop chemical producer. FMC is also among our analysts’ top 33 undervalued stocks for the first quarter. While we think that the firm’s distributions are appropriate and that the company will generate sufficient cash flows to maintain its dividend, FMC faces cyclicality risk and as a result is carrying elevated leverage on the books as chemical crop demand approaches its cyclical bottom, explains ’s Goldstein. We think this dividend-growth stock looks attractive as it trades 48% below our $110 fair value estimate.
Sirius XM Holdings
- Price/Fair Value: 0.57
- Economic Moat Rating: Narrow
- Forward Yield: 2.49%
- Capital Allocation Rating: Exemplary
- Industry: Entertainment
Also new to our list of undervalued dividend-growth stocks, Sirius XM trades 57% below our fair value estimate of $7.50. Warren Buffett’s Berkshire Hathaway recently increased its position in the dividend stock. The company consists of two businesses: SiriusXM and Pandora. Sirius XM management prioritizes shareholder returns, says senior analyst Matthew Dolgin; the firm earns an Exemplary capital allocation rating. While its board issued a special dividend in 2022 because of company outperformance in 2021, we don’t expect another special dividend anytime soon, adds Dolgin.
Lithia Motors
- Price/Fair Value: 0.60
- Economic Moat Rating: Narrow
- Forward Yield: 0.67%
- Capital Allocation Rating: Standard
- Industry: Auto and Truck Dealerships
Lithia Motors sells new and used vehicles and provides related services, often in rural markets where there are no competitors within 100 miles. This rural focus gives Lithia pricing power and contributes to its economic moat, says strategist David Whiston. Whiston calls the balance sheet “healthy” and commends the firm for raising its dividend in 2020 despite the coronavirus pandemic. We view Lithia’s growth runway as excellent; in fact, Whiston calls Lithia “the most exciting growth story in our auto dealer coverage.” This cheap dividend-growth stock trades 40% below our $500 fair value estimate.
Baxter International
- Price/Fair Value: 0.61
- Economic Moat Rating: Narrow
- Forward Yield: 2.83%
- Capital Allocation Rating: Standard
- Industry: Medical Instruments and Supplies
Of the dividend-growth stocks on our list, Baxter International may require a longer-term mindset than some others. True, the firm can claim top-tier positions in most of its product lines and benefits from switching costs, which underpin its narrow moat rating. However, supply chain disruptions and economic uncertainty stalled Baxter in 2022 more so than some of its peers, observes senior analyst Julie Utterback. Perhaps more troubling for dividend-growth aficionados, the company will slow the growth of its dividend as it integrates the Hillrom deal, which negatively affected its net leverage. That being said, Utterback expects Baxter to resume growing its dividend in line with earnings once the firm hits its leverage target, and we think the stock looks cheap, trading 39% below our $67 fair value estimate.
Polaris
- Price/Fair Value: 0.64
- Economic Moat Rating: Wide
- Forward Yield: 2.82%
- Capital Allocation Rating: Exemplary
- Industry: Recreational Vehicles
Polaris is one of the longest-operating brands in powersports. senior analyst Jaime Katz notes that fourth-quarter earnings disappointed and the company’s forecast for 2024 is plagued by slowing industrywide demand. We nevertheless expect Polaris to produce strong cumulative cash flow over the next five years and to continue to grow its dividend, averaging a 33% payout ratio over the next decade, she adds. This dividend-growth stock to buy trades 36% below our $145 fair value estimate.
ResMed
- Price/Fair Value: 0.68
- Economic Moat Rating: Narrow
- Forward Yield: 1.10%
- Capital Allocation Rating: Exemplary
- Industry: Medical Instruments & Supplies
ResMed is one of two leading players in the global obstructive sleep apnea market, and we see plenty of global growth opportunity ahead, says analyst Shane Ponraj. The firm is in a strong financial position, and while shareholder distributions might seem low (averaging 38% of underlying net income over the past five years), we think the level is appropriate, given that the company has instead chosen to spend more on strategic acquisitions that take advantage of trends in digital health in the home-care setting, concludes Ponraj. The stock looks cheap to us as it trades 32% below our $258 fair value estimate.
Comerica
- Price/Fair Value: 0.68
- Economic Moat Rating: Narrow
- Forward Yield: 5.73%
- Capital Allocation Rating: Standard
- Industry: Banks—Regional
Comerica is the highest-yielding stock on our list of cheap dividend-growth stocks to buy. Comerica is largely a commercial-focused bank, with more than 90% of loans related to commercial lending, reports analyst Rajiv Bhatia. Fourth-quarter results were decent on the surface, but we forecast profitability to worsen over the short term as net interest income continues to decline and expenses trend higher; we expect the pattern to flatten in 2024. We still expect the bank to remain profitable and to easily cover its dividend, says Bhatia. We currently assign a $73 fair value estimate to this dividend-growth stock; it’s trading 32% below that.
Eastman Chemical
- Price/Fair Value: 0.70
- Economic Moat Rating: Narrow
- Forward Yield: 3.72%
- Capital Allocation Rating: Standard
- Industry: Specialty Chemicals
Eastman Chemical stock is about 30% undervalued relative to our $125 fair value estimate. The global specialty chemicals company generates most of its sales outside of the US. Although Eastman reported companywide volume declines year over year during the latest quarter, we expect 2024 will show a gradual recovery, says ’s Goldstein. The company generates strong cash flows and should therefore have no trouble meeting its dividend, he adds. Notably, management’s compensation is tied to return on capital and return to stockholders.
Humana
- Price/Fair Value: 0.70
- Economic Moat Rating: Narrow
- Forward Yield: 1.01%
- Capital Allocation Rating: Standard
- Industry: Healthcare Plan
The final new name on our list of cheap dividend-growth stocks to buy—and the final name on the list altogether—is Humana. Humana stock is trading 30% below our fair value estimate. Management’s outlook for 2024 and 2025 came out weaker than we expected, particularly the company’s core end market of Medicare Advantage, admits ’s Utterback. The firm nevertheless maintains a strong franchise and remains at the forefront of one of the fastest-growing areas in US medical insurance. She calls the company’s dividend rate “modest” and notes that the dividend should be maintained despite weakness in near-term profit prospects. We think this dividend-growth stock is worth $500 per share.
Dividend-Growth Stocks and Economic Moats
thinks that companies with economic moats have significant advantages that allow them to successfully fend off competitors for decades. Such high-quality companies can carve out their moats in a variety of different ways—by having high switching costs, through strong brand identities, or by possessing economies of scale, to name just a few.
Companies that we think can maintain their competitive advantages for at least 10 years earn narrow moat ratings; those we think can successfully compete for 20 years or longer earn wide moat ratings.
Of course, companies that do not have
economic moats can exhibit dividend growth. But for purposes of this article,
we included only stocks that have narrow or wide moat ratings, choosing to
place our bets with high-quality companies.
Cheap Dividend-Growth Stocks: More Ideas to Consider
Investors who would like to find more undervalued dividend-growth stocks to research further can do the following:
- Review the full list of stocks included in the US Dividend Growth Index. Those dividend stocks with Ratings of 4- or 5-stars are undervalued according to our metrics.
- Peek into the portfolios of some of the best dividend-growth-stock managers for new ideas. Some highly rated funds focused on dividend-growth stocks include Vanguard Dividend Growth VDIGX and T. Rowe Price Dividend Growth PRDGX.
- Use Investor to build a watchlist of dividend growth stocks and create a view that allows you to easily follow the valuations, ratings, and dividend yields of the stocks on your list.