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4 Dividend Stocks to Own

These stocks are among the top-10 holdings in several of our favorite dividend-growth funds.

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For some things in life, we seek stamps of approval. Maybe we've built a proposal for a new product idea, hopeful that upper management will put together a small team to explore it further. Or we make a new recipe and are encouraged when our often-mum teenagers say how good it is. Or we decide to use a certain contractor for our bathroom remodel because two neighbors had good experiences--and now have stunning bathrooms.

Similarly in investing, knowing that a well-respected money manager owns a stock that you own--or a stock that you’re eyeing--can serve as a stamp of approval.

Today, we're taking a glimpse at the top-10 holdings of three of our favorite dividend-growth stock fund managers.

First up: Gold-rated Vanguard Dividend Growth (VDIGX), which closed to new investors in 2016.

"Longtime manager Donald Kilbride looks for cash-rich firms with good prospects for continued dividend increases and tries to get them at a reasonable price," summarizes Morningstar senior analyst Alec Lucas. Kilbride maintains a portfolio of 45 to 55 holdings.

Here are the fund's most recently reported top holdings:

Silver-rated  T. Rowe Price Dividend Growth (PRDGX) manager Tom Huber favors dividend-payers that can sustain or grow their dividends.

"He looks for companies with durable competitive advantages, ample cash flow, and management teams that allocate capital with shareholders' interests in mind, whether that's through dividends or buybacks," explains Morningstar analyst Robby Greengold. Huber is willing to wait for his investment theses to play out and holds more than 100 names.

Here are the fund's top 10 stocks:

Bronze-rated Hartford Dividend and Growth (IHGIX) maintains an 80- to 100-name portfolio of dividend-payers.

"Lead manager Edward Bousa keeps the fund's roughly 80- to 100-stock portfolio rooted in large-cap dividend-payers, which he tries to buy when they're out of favor," says Lucas. Bousa also likes stocks that should benefit from changes in supply and demand, and he will pick up growth names on dips.

The fund's 10 largest positions are:

Three stocks make the top 10 in two of these fine dividend-growth funds; one stock lands among the top holdings for all three funds.

Here's a little bit about the four in-common names. While not all of these stocks are buys today according to our metrics, they're certainly watchlist-worthy.

 Microsoft (MSFT)
Microsoft is the only stock that cracks the top 10 for all three funds; it's also the top holding for both T. Rowe Price Dividend Growth and Hartford Dividend and Growth. Trading in 4-star range, the stock is undervalued according to our metrics and carries a 1.7% dividend yield.

We expect this blue-chip technology stock to offer about 15% earnings per share growth in each of the next several years, says Morningstar analyst Dan Romanoff, adding that CEO Satya Nadella has transformed Microsoft into a cloud leader. The stock earns a Morningstar Economic Moat Rating of wide and a stable moat trend.

"Dividends per share have grown at a 13% compound annual growth rate over the last five years," notes Romanoff. "We believe the company will continue to buy back shares, shrink the share count, and raise the quarterly dividend over the next several years." 

 Chubb (CB)
A top holding in two of the portfolios featured here, Chubb is fairly valued according to our metrics. Its dividend yield stands at 2.19%.

ACE acquired Chubb in 2016, and the combined company retained the Chubb name.

"From a long-term perspective, we are most enthusiastic about the fact that the combination created a moaty international insurer with exposure across most insurance lines for the first time, marking Chubb as potentially the most attractive name in the space from a fundamental point of view," argues Morningstar senior analyst Brett Horn.

We've assigned the diversified insurer a narrow economic moat rating and a stable moat trend. We think the majority of its business lines are moat-worthy--a rarity among diversified insurance operations, notes Horn. He thinks the franchise's absolute performance remains strong, despite somewhat soft fourth-quarter results.

 JPMorgan Chase (JPM)
The global financial-services firm is among the top-three holdings for two of the funds featured here. With a dividend yield of 3.03%, shares are about fairly valued today according to our metrics.

We award the juggernaut a narrow moat and stable moat trend. We think that JPMorgan benefits from a nearly unrivaled combination of scale and scope in the United States, reports Morningstar analyst Eric Compton--providing the firm with some unique partnership opportunities with the likes of  Visa (V) and  Amazon.com (AMZN).

"JPMorgan Chase’s combination of scale, diversification, and sound risk management seems like a simple path to competitive advantage, but few other firms have been able to execute a similar strategy," he explains. "Even the best-managed banks are not immune to the occasional stumble, but we'd likely view any potential setbacks at JPMorgan as buying opportunities."

 Pfizer (PFE)
The drugmaker lands among the top holdings of two of the funds. Trading in 4-star range as of this writing, shares are undervalued. The stock offers a 3.40% dividend yield, to boot.

We assign Pfizer a wide economic moat rating and a stable moat trend, thanks to the strong cash flows generated by its portfolio of diverse drugs. The firm has one of the largest economies of scale in the pharmaceutical industry, says Morningstar sector director Damien Conover. Moreover, its late-stage pipeline includes several drugs with the potential to become major blockbusters.

"While the company has made many poor capital-allocation decisions over the past decade, the current management team appears to be focusing on significantly better uses of cash, including share buybacks and dividends," concludes Conover.

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