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.