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5 Undervalued Dividend-Growth Stocks

These dividend-paying companies have competitive advantages and a history of raising their dividends—and their stocks are cheap today.

A photo illustration of author Susan Dziubinski.
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While they may not be the highest-yielding stocks around, dividend-growth stocks—those that have a history of steady and increasing dividends over time—have three things going for them today:

  • Companies with growing dividends tend to be profitable and financially healthy—two valuable qualities during periods of economic uncertainty.
  • Such companies are also more likely to have significant competitive advantages that may allow them to pass along price increases and thereby maintain margins during inflationary times.
  • Dividend-growth stocks tend to be less volatile than the overall market.

In a recent episode of Dividend Stock Deep Dive, Dan Lefkovitz, a strategist with Morningstar Indexes, mentioned several well-positioned companies from the Morningstar US Dividend Growth Index whose stocks are undervalued today.

Undervalued Dividend-Growth Stocks for June 2022

These five stocks have increased their dividend payments over the past five years, pay out no more than 75% of their earnings in the form of dividends, possess competitive advantages, and are trading below Morningstar’s fair value estimate.

  1. Cummins CMI
  2. Emerson Electric EMR
  3. Medtronic MDT
  4. Skyworks Solutions SWKS
  5. Truist Financial TFC

Here’s a little bit about why we like each of these companies, along with some other key metrics. All data is as of June 6, 2022.

Cummins

  • Price/Fair Value: 0.89
  • Morningstar Economic Moat Rating: Narrow
  • Forward Dividend Yield: 2.77%
  • Industry: Specialized Industrial Machinery

Cummins stock is trading about 11% below our fair value estimate of $238 per share. The top supplier of truck engines and components, Cummins reported solid first-quarter results despite a challenging supply chain environment. We think there’s pent-up demand in the trucking industry, and we expect Cummins to benefit, remaining the top supplier in the market, says Morningstar analyst Dawit Woldemariam. Cummins commands strong brand loyalty, and we assign the company a narrow economic moat rating. Cummins is committed to increasing its dividend yearly, even during economic downturns.

Emerson Electric

  • Price/Fair Value: 0.80
  • Morningstar Economic Moat Rating: Wide
  • Forward Dividend Yield: 2.32%
  • Industry: Specialty Industrial Machinery

Emerson Electric stock is trading about 20% below our fair value estimate of $113 per share. This multi-industrial conglomerate put up solid numbers in the second quarter, which is notable, given the supply chain disruptions and inflationary pressures facing the industry, says Morningstar senior analyst Josh Aguilar. Emerson earns a wide economic moat rating, suggesting that it has significant competitive advantages, particularly in its automation solutions business. The company has increased its dividend for 65 consecutive years—and we expect that streak to continue, says Aguilar.

Medtronic

  • Price/Fair Value: 0.74
  • Morningstar Economic Moat Rating: Wide
  • Forward Dividend Yield: 2.85%
  • Industry: Medical Devices

Medtronic stock is trading about 26% below our fair value estimate of $129 per share. As one of the largest medical device companies with a product portfolio covering a wide range of chronic diseases (think pacemakers, heart valves, insulin pumps, and surgical tools), Medtronic is a key partner for its hospital customers. As a result, we think the company has significant competitive advantages and assign it a wide economic moat rating. Although Medtronic has experienced some supply chain challenges lately, we view these issues as near-term speed bumps, says Morningstar senior analyst Debbie Wang. The company has raised is dividend for 45 consecutive years.

Skyworks Solutions

  • Price/Fair Value: 0.59
  • Morningstar Economic Moat Rating: Narrow
  • Forward Dividend Yield: 2.06%
  • Industry: Semiconductors

Skyworks Solutions stock is trading about 41% below our fair value estimate of $180. Like many technology stocks, Skyworks stock has been hit hard this year: It’s down more than 30%. First-quarter results for the company—which produces semiconductors for wireless handsets and other devices—were solid, but its forecast for the June quarter disappointed. Yet, Morningstar is bullish on the stock. “Although the company faces an intense competitive landscape, it should succeed in the coming years as the handset industry focuses on 5G devices, which we expect to require higher-radio-frequency dollar content per phone,” says Morningstar technology sector director Brian Colello.

Truist Financial

  • Price/Fair Value: 0.77
  • Morningstar Economic Moat Rating: Narrow
  • Forward Dividend Yield: 3.86%
  • Industry: Banks–Regional

Truist Financial stock is trading about 23% below our $64 fair value estimate. The combination of BB&T and SunTrust, Truist is a regional bank with a presence largely in the southeastern United States. We think it is one of the better regionals in the U.S. from a competitive standpoint, says Morningstar senior analyst Eric Compton. We’ve assigned Truist a narrow economic moat rating thanks to its superior credit efficiency, operating efficiency in the top quartile of U.S. regionals we cover, and reasonable cost of deposits, says Compton. Like most banks, Truist returns more capital through share repurchases than dividends, since its earnings can be volatile, and it prizes dividend stability.

The Best Dividend Stocks

Of course, looking at stocks through the lenses of competitive advantages and dividend growth is just one approach to finding top dividend stocks. Investors focused more on generating income from dividend stocks might be inclined to instead favor dividend stocks that boast both high quality and high yield, for instance. No matter your preference, you can find a steady stream of new dividend stock ideas in to our monthly video series, Dividend Stock Deep Dive, where Morningstar DividendInvestor editor and host David Harrell talks with specialists about dividend stocks in various sectors. Recent episodes include conversations about dividend prospects in real estate, utilities, and healthcare.

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Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.