6 Midyear Picks for Dividend-Seekers
These undervalued stocks all boast generous yields and secure dividends.
Michael Hodel: In looking at Morningstar's Best Ideas List recently, one thing that really struck me was the high percentage of firms that have very generous dividend yields. More than 20% of the stocks that Morningstar's analysts find the most attractive on a valuation basis also provide a yield greater than 5%.
A couple of sectors that are very well represented in that group are energy firms and telecom firms, which you'd expect. Among the energy firms, midstream in particular is attractive. Enbridge is a great example of that. Enbridge is a very well diversified midstream company with natural gas pipelines, oil pipelines, and it's also the largest natural gas distributor in Canada. The stock yields more than 6%, and we expect that dividend to grow at around 10% over the next couple of years.
Another firm that we really like in the midstream space is Enterprise Products. The firm's a partnership; its units yield nearly 6%. It's one of the largest midstream companies in the United States. It has a very well-integrated set of assets across the energy pipeline from pipelines that gather resources all the way through to facilities that can process those resources. We expect this firm to grow very nicely over the next several years as well.
Turning to telecom, we've mentioned AT&T in dividend videos in the past. AT&T is one of our favorite ideas in the telecom space. Stock yields more than 6%, and we think it's very well positioned to grow that dividend modestly over time while also reducing leverage.
But looking beyond AT&T, we think there's a number of other areas as well. Outside the U.S., BT Group in the U.K. is one of our favorite stocks. Yields more than 7%. The shares have been beaten up a little bit here because growth has been poor, but we think BT has one of the best collections of assets in the U.K. with both fixed-line and wireless assets.
Another firm that we like in the telecom industry is CenturyLink. It's a little bit riskier than the traditional telecom firm. We don't think it's as well positioned competitively, especially its consumer business where it faces very stiff competition from cable companies. But this is still a business that we think can generate very steady cash flows over the next several years to support its dividend and also continue to improve its balance sheet over time, which we think will allow investors to gain more confidence in the firm's ability to generate stable cash flow and pay its dividend over time.
Outside of the energy and telecom industries, a stock that we think is really attractive for yield is WPP. WPP is the world's largest advertising agency holding company, and the shares have been beaten up because growth has been really modest recently as consumer products companies are starting to pull back on advertising and rethink how they build their brands, but we think that advertising and marketing business is becoming more complicated, not less, as advertisers shift dollars to digital advertising from traditional media. Firms like WPP that have the ability to gather data on consumer habits are well positioned to help advertisers offset the growing market power that firms like Google and Facebook have, as they also collect consumer data. And that positions WPP very well to help advertisers manage the transition from traditional advertising to digital and online advertising. With the stock yielding more than 6%, we think it's very attractively priced here.
Michael Hodel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.