What should investors be looking for when it comes to choosing the best dividend stocks?

At Morningstar, we think that the best dividend stocks aren’t simply the highest-yielding dividend stocks. Instead, we suggest that investors look beyond a stock’s yield and instead choose stocks with durable dividends and buy those stocks when they’re undervalued.

“It’s really critical to be selective when it comes to buying dividend-paying stocks and chasing yield,” explains Dan Lefkovitz, a strategist for Morningstar Indexes. “Looking for the most yield-rich areas of the market can often lead you into troubled areas and dividend traps—companies that have a nice-looking yield that is ultimately unsustainable. You have to screen for dividend durability and reliability going forward.”

Mark LaMonica suggest investors take a more holistic approach when building a dividend portfolio with a focus on both shares with higher current yields that are sustainable and dividend growth. Mark also talks about how this works in a real life basis with an exploration of his 10 ten holdings. 

Given ongoing economic uncertainty and stock market volatility, investors looking for the best dividend stocks might consider adding undervalued, quality dividend stocks to their portfolios. After all, quality companies have the financial stability to maintain their dividends during questionable economic periods, and price risk is reduced when investors can buy the stocks of these companies on the cheap.

10 best US dividend shares to consider buying

To find the best dividend stocks, we turn to the Morningstar Dividend Yield Focus Index. The dividend stocks on this list are among the index’s top constituents, and they were also undervalued, with Morningstar Ratings of 4 and 5 stars as of Jan. 15, 2024.

  1. Exxon Mobil XOM
  2. Verizon Communications VZ
  3. PepsiCo PEP
  4. Altria Group MO
  5. Wells Fargo WFC
  6. Comcast CMCSA
  7. Bristol-Myers Squibb BMY
  8. Gilead Sciences GILD
  9. Medtronic MDT
  10. NextEra Energy NEE

Here’s a little bit about each cheap dividend stock, along with some key Morningstar metrics. All data is through Jan. 15, 2024.

Exxon Mobil

  • Morningstar Rating: 4 stars
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Uncertainty Rating: High
  • Trailing Dividend Yield: 3.68%
  • Industry: Oil and Gas Integrated

Exxon Mobil tops our list of the best dividend stocks to buy. The oil giant announced last October its plans to acquire Pioneer Natural Resources; Morningstar director Allen Good calls the deal “sound,” noting that the pickup is a lean into the firm’s hydrocarbon-focused strategy. Although Exxon struggled to pay its dividend in 2020, Good says that the firm’s recent actions to reduce costs and capital spending should allow the company to meet its dividend payments. In fact, Exxon recently raised its dividend 4%. We think the stock is worth $123 and shares trade 20% below that

Verizon Communications

  • Morningstar Rating: 4 stars
  • Morningstar Economic Moat Rating: Narrow
  • Morningstar Uncertainty Rating: Medium
  • Trailing Dividend Yield: 6.83%
  • Industry: Telecom Services

Verizon is a cheap dividend stock, trading a whopping 28% below our fair value estimate of $54 per share. We think the market is overly focused on Verizon’s challenges to add postpaid consumer wireless customers, says Morningstar director Mike Hodel. Hodel argues that the improving competitive balance in the wireless industry will allow the major U.S. carriers to boost profitability in the years ahead. Verizon’s third-quarter earnings illustrated that modest customer growth hasn’t slowed free cash flow generation. Hodel observes that Verizon’s distributions are on the high side, with 65% of 2023′s estimated cash flow being directed to the dividend. But he expects the firm to hold off on share buybacks for now, given the focus on the dividend.

PepsiCo

  • Morningstar Rating: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Low
  • Trailing Dividend Yield: 2.96%
  • Industry: Beverages—Nonalcoholic

Pepsi is another dividend aristocrat on this month’s list of the best dividend stocks to buy. Pepsi notched good results in the most recent quarter thanks to snack and beverage innovations, its flexible channel strategy, and efficiency gains, notes Morningstar analyst Dan Su. We think Pepsi stock is worth $180, and shares trade below that. Pepsi has raised its dividend for 51 consecutive years, and we expect dividend payments to increase 8% annually over the next decade, says Su.

Altria Group

  • Morningstar Rating: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium
  • Trailing Dividend Yield: 9.29%
  • Industry: Tobacco

This month’s highest-yielding stock on our list of the best dividend stocks to buy, Altria is trading 21% below our fair value estimate of $52 per share. The leading tobacco maker in the United States, Altria is pursuing a multipronged approach to cigarette substitutes, points out Morningstar strategist Philip Gorham. The ability to consistently price above its rate of cigarette volume declines should ensure that the company can continue to increase its revenue, earnings, and dividend, he adds. Gorham says that dividends are the company’s top capital-allocation priority, with a stated payout ratio target of 80%.

Wells Fargo

  • Morningstar Rating: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium
  • Trailing Dividend Yield: 2.74%
  • Industry: Banks—Diversified

Wells Fargo is the only bank on our list of cheap dividend stocks, trading 11% below our $55 fair value estimate. Fourth-quarter earnings were in line with expectations, but the bank’s forecast for net interest income in 2024 was lower than expected, notes Morningstar analyst Suryansh Sharma. Although the bank is in the midst of a multiyear rebuild, we think Wells Fargo’s balance sheet is sound. While the bank had to cut its dividend because of coronavirus-era restrictions, we expect it to return to a dividend payout ratio of roughly 30%.

Comcast

  • Morningstar Rating: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium
  • Trailing Dividend Yield: 2.70%
  • Industry: Telecom Services

Comcast stock trades 28% below our $60 fair value estimate. The company’s third-quarter results disappointed, with the stock selling off after posting customer losses that were deeper than one year prior. We nevertheless think Comcast is well positioned to limit broadband share losses and enjoy solid pricing power, says Morningstar’s Hodel. Comcast instituted a dividend in 2008 and has increased its payout by 16% annually, on average, notes Hodel. We think the balance sheet is sound, and shareholder returns are generally appropriate.

Bristol-Myers Squibb

  • Morningstar Rating: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium
  • Trailing Dividend Yield: 4.59%
  • Industry: Drug Manufacturers—General

The first of two drugmaker stocks on our list of undervalued dividend stocks to buy, Bristol-Myers Squibb trades 20% below our fair value estimate of $63. The company has built a strong portfolio of drugs and a robust pipeline through adept acquisitions, explains Morningstar director Damien Conover. Its lineup of patent-protected drugs, entrenched salesforce, and economies of scale underpin its wide moat rating. While the firm’s 30% payout ratio rests below the industry average of 50%, we think the level is about right, as upcoming patent losses will drive the payout ratio closer to average over the next five years, concludes Conover.

Gilead Sciences

  • Morningstar Rating: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium
  • Trailing Dividend Yield: 3.47%
  • Industry: Drug Manufacturers—General

Gilead stock trades 13% below our fair value estimate of $97 per share. The company generates outstanding profit margins with its HIV and HCV portfolio, and its portfolio and pipeline support a wide moat rating, says Morningstar strategist Karen Andersen. Third-quarter results came in strong. The company has steadily increased its dividend over time; its payout ratio hovers around 50%, which Andersen calls “reasonable.”

Medtronic

  • Morningstar Rating: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Medium
  • Trailing Dividend Yield: 3.15%
  • Industry: Medical Devices

Medtronic stock trades 22% below our $112 fair value estimate. The largest pure-play medical-device maker is a key partner for its hospital customers, thanks to its diversified product portfolio aimed at a wide range of chronic diseases, Morningstar senior analyst Debbie Wang explains. Medtronic’s plans to spin off its patient monitoring and respiratory innovations businesses will only help the company pivot more toward faster-growing markets, she adds. Medtronic has raised its dividend for 46 consecutive years, earning it dividend aristocrat status.

NextEra Energy

  • Morningstar Rating: 4 stars
  • Morningstar Economic Moat Rating: Wide
  • Morningstar Uncertainty Rating: Narrow
  • Trailing Dividend Yield: 3.06
  • Industry: Utilities—Regulated Electric

NextEra Energy rounds out our list of the best dividend stocks to buy; it’s a dividend aristocrat, too. This narrow-moat company’s regulated utility and fast-growing renewable energy business provide investors with the best of both worlds, argues Morningstar strategist Andrew Bischof: a secure dividend and growth potential. We expect 10% dividend increases through 2027. The stock is trading 16% below our $74 fair value estimate.

What is the Morningstar Dividend Yield Focus Index?

A subset of the Morningstar US Market Index (which represents 97% of equity market capitalization), the Morningstar Dividend Yield Focus Index tracks the top 75 high-yielding stocks that meet our screening requirements for quality and financial health.

How are the stocks selected for the index? Only securities whose dividends are qualified income are included; real estate investment trusts are tossed out. Companies are then screened for quality using the Morningstar Economic Moat and Morningstar Uncertainty Ratings. Specifically, companies must earn a moat rating of narrow or wide and an Uncertainty Rating of Low, Medium, or High; companies with Very High or Extreme Uncertainty Ratings are excluded. The index includes a screen for financial health using a distance-to-default measure, which uses market information and accounting data to determine how likely a firm is to default on its liabilities; it is a measure of balance-sheet strength.

The 75 highest-yielding stocks that pass the quality screen are included in the index, and constituents are weighted according to the total dividends paid by the company to investors.