In a strong year for the broader market, dividend stocks are posting solid gains but lagging the largely growth-stock-driven rally. However, that softer performance is providing opportunities for long-term investors to find undervalued dividend-paying names, including ones raising their payouts.
Dividend investing comes in various forms. Investors can look for the stocks offering the highest yields, ones with a history of stable dividend payouts and strong finances, or companies raising dividends. For this article, we screened for stocks that have increased their quarterly dividends, which can signal a company’s confidence in its future finances. We combined this screen with one for stocks trading below their fair value estimates, meaning they have attractive prices for long-term investors. These stocks offer investors the potential to benefit from both increased dividend yields and the possibility that their investment values will grow.
Here are four undervalued companies covered by Morningstar analysts that increased their dividends in November:
• Nike NKE
• Merck MRK
• Evergy EVRG
• Microchip Technology MCHP
Screening for Undervalued Stocks That Raised Dividends
For this article, we started with the full list of US-based companies covered by Morningstar analysts and looked for names that pay a quarterly dividend to investors. We tracked changes between any dividends declared in November, and then filtered for companies that saw a dividend increase of 4% or more to capture the most substantial changes. Stocks with dividend yields under 2% were excluded. We picked companies considered undervalued by Morningstar analysts, meaning they are rated 4 or 5 stars.
In all, four companies made it through. A full list of stocks covered by Morningstar that raised dividends by 4% or more can be found at the bottom of this article.
Nike
• Morningstar Rating: 5 stars
• Fair Value Estimate: $117.00
• Fair Value Uncertainty: Medium
• Economic Moat: Wide
“Nike has returned significant cash to shareholders through dividends and stock buybacks. The company issues about $2 billion in yearly dividends, and we expect its long-term dividend payout ratio will be roughly 40%.”
—David Swartz, senior equity analyst
Merck
• Morningstar Rating: 4 stars
• Fair Value Estimate: $120.00
• Fair Value Uncertainty: Medium
• Economic Moat: Wide
“Regarding distributions, we view Merck’s dividends and share repurchases as about right. Merck has generally targeted close to a 50% payout in dividends as a percentage of normalized earnings, which seems about right for a more mature industry. Further, Merck has shown a willingness to buy back shares at generally favorable time periods.”
—Karen Andersen, strategist
Evergy
• Morningstar Rating: 4 stars
• Fair Value Estimate: $67.00
• Fair Value Uncertainty: Low
• Economic Moat: Narrow
“Since the merger (of Great Plains Energy and Westar Energy that formed Evergy), the board has raised the dividend an average of 6% annually, including a 5% increase for 2024. Management’s payout ratio target is 60%-70% of operating earnings, in line with most other regulated utilities. With the dividend payout ratio toward the high end of that range for 2024, we expect dividend growth in line with earnings growth.”
—Travis Miller, strategist
Microchip Technology
• Morningstar Rating: 4 stars
• Fair Value Estimate: $75.00
• Fair Value Uncertainty: High
• Economic Moat: Wide
“We think that Microchip has done a good job of distributing cash to shareholders. The firm has a solid dividend policy. The company increased its dividend by tiny amounts on a quarterly basis in recent years when it had higher leverage. Microchip’s peers generally grew their dividends at a faster pace, leading to Microchip’s dividend yield being below its peers. Now that the company has reattained an investment-grade rating and has a more reasonable debt balance, the company has expanded its dividend payouts to investors. Similarly, excess cash was used to fund acquisitions and pay down debt in the past, but we foresee a bit more of this cash being used for dividend hikes in the years ahead.”
—Brian Colello, strategist
This article was generated with the help of automation and reviewed by Morningstar editors. Learn more about Morningstar’s use of automation.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
