5 top US dividend shares from the best managers
These cheap dividend stocks are popular among highly rated concentrated fund managers.
Mentioned: CVS Health Corp (CVS), Medtronic PLC (MDT), Pfizer Inc (PFE), PNC Financial Services Group Inc (PNC), Roche Holding AG (RHHBY)
In life, we often seek stamps of approval. We’ll consult Tripadvisor about tours, hotels, and attractions before booking a vacation. We’re encouraged when our often-mum teenagers say how good a new recipe tastes. Or we decide to use a certain contractor for our bathroom remodel because two neighbors had good experiences and have now-stunning bathrooms.
And when investing, knowing that a successful money manager owns a stock that you’re thinking about buying can serve as a stamp of approval.
To find dividend stocks to buy with such “stamps of approval,” we turn to the portfolios of some of the best active managers running concentrated funds. These managers have confidence in their stock picks―and Morningstar has confidence in their stock-picking skills.
To isolate the best active concentrated fund managers, we screened on the following:
- Actively managed funds that land in the US large-value, US large-blend, or US large-growth Morningstar Categories.
- Funds with at least one share class earning a Morningstar Medalist Rating of Gold with 100% analyst coverage.
- Funds that hold 100 stocks or fewer as of their most recently reported portfolios.
Twelve separate fund portfolios passed our screen. We then ran a Stock Intersection report in Morningstar Direct to find undervalued dividend stocks yielding 3% or more that were popular (as determined by portfolio concentration and number of funds that own the stock) across the funds. (Most of the funds on our list do not invest exclusively in dividend-paying stocks; rather, they own dividend stocks as a byproduct of their strategies.)
We believe global dividend shares are a key part of an income investing strategy. Read more about mistakes income investors make.
5 top dividend shares from the best managers
Looking for top ASX dividend shares see this article on 10 top ASX dividend shares.
These dividend stocks are popular portfolio holdings among the best money managers, yield more than 3%, and earn Morningstar Ratings of 4 or 5 stars, suggesting that they’re undervalued. Data is as of April 5, 2024.
Here’s a little bit about each top dividend stock to buy, along with some commentary from the analyst who follows the company. All data is as of April 5, 2024.
Medtronic
- Number of best managers who own the dividend stock: 6
- Morningstar Rating for Stocks: 4 stars
- Trailing Dividend Yield: 3.26%
- Morningstar Economic Moat Rating: Narrow
- Sector: Healthcare
Medtronic leads our list of top dividend stocks to buy from the best managers, as it appears in the portfolios of half of our favorite stock-pickers. This narrow-moat company, whose stock is trading 25% below our $112 fair value estimate, is one of the largest medical-device companies. Morningstar expects that the recent uptick in medical utilization following the pandemic should continue through calendar-year 2024, notes senior analyst Debbie Wang.
The company has raised its dividend for 46 consecutive years, earning it status as a dividend aristocrat.
Medtronic’s standing as the largest pure-play medical-device maker remains a force to be reckoned with in the medical-technology landscape. Pairing Medtronic’s diversified product portfolio aimed at a wide range of chronic diseases with its expansive selection of products for acute care in hospitals has bolstered Medtronic’s position as a key partner for its hospital customers.
Medtronic has historically focused on innovation, designing and manufacturing devices to address cardiac care, neurological and spinal conditions, and diabetes. All along, the firm has largely remained true to its fundamental strategy of innovation. It is often first to market with new products and has invested heavily in internal research and development efforts as well as acquiring emerging technologies.
However, in the postreform healthcare world where there are higher hurdles for securing reimbursement for next-generation technology, Medtronic has slightly shifted its strategy to include partnering more closely with its hospital clients by offering greater breadth of products and services to help hospitals operate more efficiently. By collaborating more closely and integrating itself into more hospital operations, Medtronic is well positioned to take advantage of more business opportunities in the value-based reimbursement environment, in our view. In particular,
Medtronic has been pioneering risk-based contracting around some of its cardiac and diabetes products, which we think is attractive to hospital clients and payers alike.
As with many devicemakers, Medtronic has augmented its internal innovation with acquisitions of technology platforms, running the risk of overpaying. The large acquisition of Covidien depressed returns for far longer than typically seen among devicemakers when engaging in mergers and acquisitions. We remain wary that Medtronic, by virtue of its size and cash flows, remains one of the few medical-device competitors that could entertain another truly large acquisition.
Pfizer
- Number of best managers who own the dividend stock: 5
- Morningstar Rating for Stocks: 5 stars
- Trailing Dividend Yield: 6.19%
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
Pfizer is the highest-yielding stock on our list of top dividend stocks to buy from the best managers; five of our best managers own the stock in their funds. The stock of the wide-moat drugmaker is 37% undervalued. Morningstar director Damien Conover argues that the market underappreciates the firm’s strong pipeline; we expect new oncology drugs to be a key driver of future sales, he adds. Pfizer targets close to a 50% payout in dividends as a percentage of normalized earnings, which Conover says is about right for a mature industry.
We think this high-yield stock is worth $42.
Pfizer’s foundation remains solid, based on strong cash flows generated from a basket of diverse drugs. The company’s large size confers significant competitive advantages in developing new drugs. This unmatched heft, combined with a broad portfolio of patent-protected drugs, has helped Pfizer build a wide economic moat around its business.
Pfizer’s size establishes one of the largest economies of scale in the pharmaceutical industry. In a business where drug development needs a lot of shots on goal to be successful, Pfizer has the financial resources and the established research power to support the development of more new drugs. Also, after many years of struggling to bring out important new drugs, Pfizer is now launching several potential blockbusters in cancer and immunology.
Pfizer’s vast financial resources support a leading salesforce. Pfizer’s commitment to postapproval studies provides its salespeople with an armamentarium of data for their marketing campaigns. Further, leading salesforces in emerging countries position the company to benefit from the dramatically increasing wealth in nations such as Brazil, India, and China.
Pfizer’s 2020 move to divest its off-patent division Upjohn to create a new company (Viatris) in combination with Mylan should drive accelerating growth at the remaining innovative business. With limited patent losses and fewer older drugs, Pfizer is poised for steady growth (excluding the more volatile covid-19 product sales) before a round of major patent losses hit in 2028.
We believe Pfizer’s operations can withstand eventual generic competition; its diverse portfolio of drugs helps insulate the company from any one particular patent loss. Following the merger with Wyeth several years ago, Pfizer has a much stronger position in the vaccine industry with pneumococcal vaccine Prevnar. Vaccines tend to be more resistant to generic competition because of their manufacturing complexity and relatively lower prices.
PNC Financial
- Number of best managers who own the dividend stock: 4
- Morningstar Rating for Stocks: 4 stars
- Trailing Dividend Yield: 3.91%
- Morningstar Economic Moat Rating: Narrow
- Sector: Financial Services
The only nonhealthcare name on our list of the best dividend stocks to buy from the best managers, PNC Financial is held among four of our top managers. One of the larger regional banks in the US, PNC has done a good job of managing credit risk and avoiding value-destroying products while at the same time investing in value-accretive acquisitions, observes Morningstar director Michael Wong. We also view the bank’s duration risk management favorably, he adds. PNC Financial stock trades 10% below our $175 fair value estimate.
PNC is one of the larger regional banks in the US, has a fairly diversified fee base, and has a national presence, but is concentrated primarily in the East and Midwest. The bank has grown substantially from acquisitions, transforming itself with the integration of the troubled National City (doubling the size of PNC) in 2008, acquiring RBC’s US branch network in the Southeast in 2012, and more recently picking up BBVA USA in 2021 (a roughly 25% increase in size).
PNC has also been successful at organically expanding its customer base, both in commercial banking and in retail. An expanding client base has led to solid loan, deposit, and fee income growth. Selling new products into the formerly underperforming RBC branch network has worked as well, and PNC now seems poised to repeat this effort with the acquisition of BBVA. The bank is also attempting to grow its Midwest commercial franchise, along with retail growth efforts in the same areas where commercial expansion has been successful in the past.
A successful acquisition history and improved credit performance during the 2007 downturn make PNC one of the better operators we cover. Overall, we view the bank as a solid regional banking franchise, with a national presence and scale, retail and commercial offerings, a successful asset-management unit, and solid middle market investment banking operations with its Harris Williams unit.
PNC has executed on many expense-saving initiatives over the years, and management has been actively reinvesting many of these savings back in the business, with multiple bolt-on acquisitions already completed and more likely to occur in the future. As more and more retail transactions go through digital channels and commercial margins improve in PNC’s newer markets, we expect improving operating efficiency for the bank.
In 2023 and beyond, we’re hoping for slightly above-average growth as the bank optimizes the old BBVA footprint, although the current banking turmoil and overall economic environment could delay how soon some of these benefits show up in the financials. We also view PNC’s more conservative duration risk management favorably in the current market environment.
Roche
- Number of best managers who own the dividend stock: 3
- Morningstar Rating for Stocks: 5 stars
- Trailing Dividend Yield: 4.61%
- Morningstar Economic Moat Rating: Wide
- Sector: Healthcare
Roche is the only name on our list of the best dividend stocks to buy that’s owned by a growth-stock manager; three of our best managers in total own the stock. Roche stock is trading 44% below our fair value estimate of $55. Morningstar strategist Karen Andersen explains that while the Swiss company has been facing headwinds caused by the strength of the Swiss franc against other major currencies, the company’s fundamentals are strong. She also views Roche’s dividend payment as appropriate, as it maximizes shareholder returns but still leaves some free cash flow to repay debt or support acquisitions.
We think Roche’s drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global healthcare into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche’s diagnostic expertise.
Roche’s biologics focus and innovative pipeline are key to the firm’s ability to maintain its wide moat and continue to achieve growth as current blockbusters face competition. Blockbuster cancer biologics Avastin, Rituxan, and Herceptin are seeing strong headwinds from biosimilars. However, Roche’s biologics focus (more than 80% of pharmaceutical sales) provides some buffer against the traditional intense declines from small-molecule generic competition.
In addition, with the launch of Perjeta in 2012, Kadcyla in 2013, and Phesgo (a subcutaneous coformulation of Herceptin and Perjeta) in 2020, Roche has somewhat refreshed its breast cancer franchise. Gazyva, approved in CLL and NHL and in testing in lupus, as well as new bispecific antibodies Columvi and Lunsumio will also extend the longevity of the Rituxan blood cancer franchise. Roche’s immuno-oncology drug Tecentriq launched in 2016, and we see peak sales potential above $5 billion. Roche is also expanding outside of oncology with MS drug Ocrevus ($9 billion peak sales) and hemophilia drug Hemlibra ($6 billion peak sales).
Roche’s diagnostics business is also strong. With a 20% share of the global in vitro diagnostics market, Roche holds the number-one rank in this industry over competitors Siemens, Abbott, and Ortho. Pricing pressure has been intense in the diabetes-care market, but new instruments and immunoassays have buoyed the core professional diagnostics segment.
CVS Health
- Number of best managers who own the dividend stock: 3
- Morningstar Rating for Stocks: 4 stars
- Trailing Dividend Yield: 3.33%
- Morningstar Economic Moat Rating: Narrow
- Sector: Healthcare
CVS Health rounds out our list of top dividend stocks to buy from the best money managers; three managers from our list of superb stock-pickers own the name. CVS has moved away from being just a retail pharmacy and has diversified into other businesses, including pharmacy benefits management, health insurance, and most recently, primary care services.
Morningstar senior analyst Julie Utterback notes that the firm’s acquisitions have pushed up its debt levels, which has sometimes constrained its other capital allocation activities, such as raising its dividend. CVS stock is trading 28% below our $103 fair value estimate.
CVS aims to be the most customer-centric health company in the United States and has spent over a decade positioning itself as a managed-care leader, with the acquisitions of pharmacy benefit manager Caremark (2007), insurance provider Aetna (2018), and healthcare service provider Oak Street (2023) defining its strategic direction. CVS’ top-tier retail pharmacy, health insurer, and PBM franchises create the potential to improve health outcomes and even bend the healthcare cost curve for its clients, especially if it can align incentives by owning healthcare service providers, as well.
CVS appears uniquely positioned to improve health outcomes, and we appreciate management’s focus on better leveraging its assets through digital and other means to bring a more consumer-centric approach to healthcare, which could provide many benefits. For example, a recent observational study showed when members use both CVS medical and pharmacy benefits, their medical costs decline 3%-6% over a three-year period through factors like fewer hospitalizations and emergency room visits. Driving savings like that would be attractive to many potential clients, like self-funded employers, and CVS’ own at-risk operations, like its Medicare Advantage plans, by reducing medical costs.
Also, CVS continues to dive further into healthcare services especially through recent acquisitions of primary-care assets. We think the relatively high-margin healthcare services business could eventually accelerate CVS’ profit growth directly or by reducing long-term costs in its medical and pharmacy benefit businesses.
With its integrated strategy, management aims to accelerate bottom-line growth to the mid to high single digits in the long run, which we think is achievable.