When we screen for top dividend-paying stocks among the holdings of our Ultimate Stock-Pickers we try to hone in on the highest-quality names that are currently held with conviction by our top managers. Morningstar maintains a list of 26 US-based fund managers that we believe are worth monitoring on a regular basis – our Ultimate Stock-Pickers, and cross check our stock research against the opinions of professional money managers.
When we’re looking for top dividend picks, we screen for holdings that are widely held by five or more of our top managers, are yielding more than the S&P 500, represent firms wide or narrow economic moats, and have uncertainty ratings of either low or medium.
With valuation being a bigger concern for investors right now, we thought it best to try and hone in on the names on both list that are trading at less than 85% of our analysts' fair value estimates, believing that there might be more value to be had in solid dividend payers offering investors a wider than average margin of safety.
We've included a few of our observations below, starting with the three names that showed up on both of our lists – the top yielding stocks and the most widely held yielding stocks.
Procter & Gamble (PG)
Current Yield: 3.74%
Morningstar analyst Erin Lash reconfirmed her $90 per share fair value estimate for wide-moat rated Procter & Gamble following the company's release of fourth-quarter earnings at the end of July. Despite the company posting only a low-single-digit year-over-year increase in sales, Lash believes that by rationalising its brand portfolio and focusing on its highest-return opportunities, Procter & Gamble will return revenue growth to a mid-single-digit rate in the coming years.
She believes that as the brand portfolio is condensed, Procter & Gamble should become a much more nimble operator in the consumer space, with a more profitable cadre of products in its stable. Combined with ongoing efforts to further slim its cost structure, Lash sees operating margins expanding at Procter & Gamble by up to 350 basis points over the next decade.
This should generate more cash flow for the firm to reinvest back into the business and return to shareholders. Lash notes that Procter & Gamble views its dividend as a high priority, demonstrated by 125 consecutive years of dividend payments.
General Electric (GE)
Current Yield: 3.71%
Wide-moat rated General Electric, covered by Morningstar analyst Barbara Noverini, continues to remain focused on shrinking its volatile GE Capital segment while focusing on growing its well-established and dominant industrial business.
Even after the sale of certain GE Capital assets Capital One Financial (COF), as well as the most recent news that the company has received permission to complete its acquisition of Alstom, the stock remains undervalued.
The company's resilience in the face of uncertain global macroeconomic conditions, aided by the diversity of its end markets and geographic exposure, is another near-term positive for the firm. Noverini expects General Electric's dividend, which was cut in the aftermath of the 2008-09 financial crisis to help support GE Capital, to be able to grow off its current base, given the strength and positioning of the company's industrial businesses.
Unilever (ULVR)
Current Yield: 3.45%
Morningstar analyst Erin Lash also covers wide-moat rated Unilever, which she thinks will continue to leverage its global scale and brands to deal with increased competitive pressures.
While investors seem concerned about the company's heavier exposure to emerging and developing markets, with its shares trading at 83% of Lash's fair value estimate, she notes that Unilever's portfolio of essential household products are more likely to be resilient during periods of economic distress.
She believes that Unilever maintains a pulse on local consumer preferences and effectively spends behind its brands. Lash thinks that Unilever’s strong 8% free cash flow yield should provide it with ample cash to distribute in the form of dividends.
Unless there is a major acquisition, she believes the firm is likely to continue to pay out around 50% of annual earnings in the form of dividends, which would imply mid-to-high-single-digit dividend growth during the next decade for the company.
