Morningstar Takes Magnifying Glass to Dividend Stocks

You might consider dividend stocks, which can provide regular income payments and potential capital gains.

With the stock market so volatile in recent months, you might consider dividend stocks, which can provide regular income payments and potential capital gains.

David Harrell, an editorial director with Morningstar Investment Management, recently took a look at three popular dividend stocks that are assigned moats (durable competitive advantages) by Morningstar analysts.

United Parcel Service  (UPS) - Get Free Report, the delivery service.

Morningstar analyst Matthew Young gives the company a wide moat and puts fair value for the stock at $179. It recently traded at $189.

The company is approaching dividend aristocrat status, which means dividend increases for at least 25 straight years. UPS could achieve that in 2025, Harrell says. In early 2022, UPS raised its dividend by nearly 50%. It recently yielded 3.4%.

“UPS just announced its dividend increase for 2023, which, as expected, was more modest than last year’s — a raise of about 6.5%,” Harrell said.

“Last year’s increase represented a structural change in the company’s dividend approach, bringing the payout ratio higher,” he said.

“It also followed a year of extremely strong earnings growth. Ongoing raises will probably more closely track the company’s rate of annual earnings growth.

Lockheed Martin Has Wide Moat

Lockheed Martin  (LMT) - Get Free Report, the aerospace defense contractor

Morningstar analyst Nicolas Owens assigns the company a wide moat and puts fair value for the stock at $437. It recently traded at $469.

The company has raised its quarterly dividend rate by 20 cents for each of the last five years. That’s all and well and good, but it means that dividend increases have turned smaller on a percentage basis each year, Harrell notes.

“Still, the most recent raise represented a 7.1% increase, and five-year annualized dividend growth is a healthy 9.4%.”

In any case, Lockheed represents an example of how dividend growth can lag stock-price appreciation, resulting in a lower yield. The stock recently yielded 2.6%, down from 3.1% a year ago, thanks to the stock’s 37% price runup in 2022.

Paramount Expected to Invest in Content

Paramount Global  (PARA) - Get Free Report, the video media stalwart.

Morningstar analyst Neil Macker gives the company a narrow moat and puts fair value for the stock at $45. It recently traded at $24.

Paramount Global was formed by the reunion of Viacom and CBS in 2022. “While Paramount trades at a large discount to [Macker’s] fair value and currently provides a yield of more than 4%, future dividend growth could be minimal,” Harrell said.

Macker expects Paramount to invest more aggressively in creating content and in revitalizing the cable networks and Paramount studio, along with paying down the debt load.

But, “management has made no mention of the dividend in the three earnings calls held since the merger,” Harrell explained.

“The current dividend represents more than half of consensus earnings for 2022 and a larger percentage for fiscal 2023. This doesn’t seem promising for any near-term dividend increases.”