Despite all of the volatility we've seen in the market this year, from the global sell-off in January and February to the drop in the markets following the Brexit vote, the S&P 500 is up mid to high single digits.
While not all stocks have recovered – plenty of healthcare and financial services stocks are still trading lower than they were at the start of the year – many have rallied. Several sectors that have traditionally been associated with yield and/or safety – like utilities and consumer defensive – have been bid up in the process.
Searching for yield in this type of environment can be fraught with risks, from price risk to the risk that a firm cannot meet its dividend commitment, which weighs on investors' minds.
In an effort to offset some of these risks, we eliminate stocks with higher uncertainty ratings from our screening process. Even after doing this, six out of 10 names are trading at or above our analysts' fair value estimates, which if bought at today's prices would diminish the amount of total return for long-term investors. With that in mind, we expect to focus on the names that have both a solid yield and a more favourable price to fair value ratio, which, not surprisingly, points us to names from the healthcare and financial services sectors.
How We Found these Dividend Paying Stocks
Morningstar’s Ultimate Stock Pickers is a list of top performing equity fund managers who have delivered through market cycles. When analysts 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. We accomplish this by screening for holdings that are widely held by five or more of our top managers, are yielding more than the S&P 500, represent firms with wide or narrow economic moats, and have uncertainty ratings of either low or medium.
Top 10 Dividend-Yielding Stocks
Emerson’s primary competitive advantage occurs in the business lines where it meets a customer’s need for a total system solution with proprietary Emerson equipment and engineering expertise, leading to stronger customer relationships.
This dynamic allows Emerson to rise above commodity producers of parts and equipment in the competitive landscape. Analyst Barbara Noverini believes this will help the firm to continue to consistently out-earn its cost of capital even amid continued slowness in some cyclical end markets.
Emerson’s diverse makeup of businesses also helps to reduce cash flow volatility and mitigates some of this cyclicality. The firm remains in solid financial health and has a long history of returning capital to shareholders, which should help Emerson remain a steady dividend payer for years to come.
Most of the drug manufacturers have been caught up in a politically charged healthcare storm during the past year, and AbbVie has not been immune to this environment. Morningstar analyst Damien Conover notes that AbbVie's cash flows exhibit low volatility due to a diverse and inelastic product portfolio, leading him to assign a medium uncertainty rating to the firm.
Also, despite the high dependence on one key drug, AbbVie has a strong balance and should produce robust cash flows over the next several years, supporting its current dividend.
Conover also covers Novartis and believes that patents, economies of scale, and a powerful distribution network support his wide-moat and low uncertainty ratings for Novartis.
Conover notes that Novartis' diverse platform of products should translate into steady cash flows, enough to easily service debt requirements and provide plenty of excess capital to fund its dividend, which represents close to 60% of the company's normalised earnings. He expects continued dividend increases but at a slower rate over the next two years.
ExxonMobil has historically set itself apart from the other majors as a superior capital allocator and operator, delivering higher returns on capital relative to peers as a result. Morningstar analyst Allen Good expects Exxon to maintain its lead in returns, but forecast a decline from historical levels, owing to reliance on higher-cost projects to replace reserves.
As a result of low oil prices, Exxon ceased repurchasing shares outside of those to offset dilution. Good expects the firm will eventually resume repurchasing shares as improved cash flow brings on higher-cash-margin barrels, spending falls, and oil prices recover.
Pfizer is one of the world's largest pharmaceutical firms, with annual sales close to $50 billion. Morningstar analysts don’t expect any significant fair value estimate changes in the drug group based on Democratic presidential candidate Hillary Clinton’s disclosed drug pricing plan targeting unjustified price increases for older drugs.
Wells Fargo was the cheapest name on a price to fair value basis on both of our lists, trading at 80% of our analyst's $62 per share fair value estimate. Morningstar analyst Jim Sinegal recently raised his fair value estimate for the bank following a deeper dive on the interest rate environment. While interest-rate expectations have swung dramatically in recent months, Sinegal expects technological-driven downward pressure on real interest rates to persist over the long run.
As for the dividend, he notes that Wells Fargo plans to eventually return a significant majority of earnings to its owners in the form of dividends and repurchases, but that the amount that the firm can return to shareholders is limited by the Federal Reserve's periodic stress tests.
Unilever's scale and scope give it competitive advantages, and with 58% of sales generated in emerging markets, the firm offers substantial exposure to growth markets. However, although analysts view the shift in emphasis to personal care from packaged food as a net positive, they expect Unilever to have limited success in expanding its volume and margins simultaneously, given the highly competitive nature of its categories.
Intangible assets in the form of brand equity, scale advantages, and meaningful customer switching costs give Cisco a durable competitive advantage in its core markets of switches and routers.
Procter & Gamble is working to course-correct from entering too many new markets quickly and failing to bring new products to market that win with consumers, particularly emerging markets, where competitors already have a leg up. Analysts think P&G's recent strategic actions indicate it is parting ways with its former self to become a more nimble and responsive player in the global consumer products arena.
General Electric made great progress in 2015 in repositioning its portfolio back toward its industrial businesses. Harking back to the company’s 100-year old roots as a pioneer in energy distribution, GE’s seven core industrial segments still share the common theme of infrastructure development, powering the industrial internet that has come to symbolise the company’s future growth platform.
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