Morningstar Gives Cautious Outlook on Three Dividend Stocks

Dividend stocks can provide a measure of safety for investors in times of equity-market volatility, like the last seven months.

There’s an opportunity to snag stocks with growing payouts and growing share prices.

David Harrell, editor of the Morningstar DividendInvestor newsletter, has published an evaluation of three popular dividend stocks. He’s not particularly bullish on the dividend story for any of the three.

Dominion Energy

(D) - Get Free Report

Morningstar moat (durable competitive advantage) rating: narrow. Morningstar fair value estimate: $59. Monday’s close: $56.50

Dominion is a predominantly-regulated utility, based in Richmond, Va. Its forward dividend is “an attractive” 4.7%, Harrell says. “But its five-year dividend-growth rate remains negative, following a 33% dividend reduction in late 2020.”

In February, the utility announced that its 2023 dividend payout would remain unchanged from 2022. Management committed to the current dividend and a return to a 65% payout ratio (the ratio of shareholder distributions to net income), Harrell wrote.

The company said it expects to achieve this goal without making a dividend cut. Given Morningstar’s earnings expectations for Dominion in 2023-24, Harrell doesn’t see a dividend increase before 2025.

JPMorgan Chase

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Morningstar moat rating: wide. Morningstar fair value estimate: $146. Monday’s close: $137.07.

The country’s biggest bank is taking over recently-failed First Republic. Morningstar analysts believe the acquisition is a good deal for JPMorgan. But the benefit doesn’t look big enough to move the needle on its dividend.

The stock has a 2.9% dividend yield, with 13.5% annualized dividend growth over the past five years. However, the dividend hasn’t been increased since the final payout of 2021, Harrell points out.

“Morningstar analysts note that the capital allocation plan for JPMorgan has generally been for roughly 30%–35% of earnings to be devoted to dividends, with the remaining 65% dedicated first to investing in the business and any leftovers used for repurchases.”

Looking forward, “with a projected payout ratio of 29% for 2023, JPMorgan should have room for a modest dividend increase, which would likely be announced later in the second quarter,” following its annual government stress test, Harrell said.

Realty Income 

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Morningstar moat rating: none. Morningstar fair value estimate: $76. Monday’s close: $62.76.

This retail REIT (real estate investment trust) markets itself as the “The Monthly Dividend Company.” It usually raises its dividend — 4.9% now -- several times a year, Harrell says.

It has done so twice so far in 2023. “However, these raises are quite small, resulting in annualized dividend growth of 3.2% over the past five years,” Harrell explains.

“The attractiveness of any dividend-paying stock increases as the share price decreases (thereby boosting the investor’s yield on cost),” he says. That assumes of course that the company is fundamentally sound.

“Given that Realty Income’s dividend-growth rate is likely to remain low, the purchase price … becomes a large consideration,” which is true with the other two stocks as well, Harrell says.