David Harrell: Hi, I’m David Harrell, editor of the Morningstar DividendInvestor Newsletter. And I’m joined once again by Dave Sekera, who is Morningstar’s Chief US Market Strategist. Dave, thanks for being here.
David Sekera: Of course. Can’t believe it’s been six months already.
Harrell: Like you say, we do this every January. You give us your 10 dividend picks for the year, and then we have the midyear check-in. And so that’s the last time we spoke. I really just wanted to dive in and see where you were with that list of 10 from midyear. And I know you’re keeping some, and you’re going to swap some of the others out, but we can go down that list. I think the first was Verizon VZ.
Sekera: Exactly. Verizon is one that we’ve been recommending actually for quite a while. And I’d say there’s really been no change in the investment thesis on the company overall. Still a 4-star-rated stock, trades at about a 25% discount to fair value, has around a 7% dividend yield. Overall, I’d say in the wireless business, over time, we still expect that it will transition into more of an oligopoly. There’s really only the three main providers, meaning that over time, they’ll compete less and less on price. As such, we’re expecting margins to expand over time, which is why we still like that stock.
10 Undervalued Dividend Stocks for 2026
- Verizon Communications VZ
- Kraft Heinz KHC
- Entergy Transfer ET
- Healthpeak DOC
- Realty Income O
- Duke Energy DUK
- Alliant Energy LNT
- Mondelez International MDLZ
- Clorox CLX
- Devon Energy DVN
Harrell: Great. And the second is a company that’s going to be two companies before the end of 2026.
Sekera: Exactly. Kraft Heinz KHC, as you mentioned, it is splitting up. Now they have said that they’re going to keep the dividend the same. I don’t know exactly how between the new stocks they’re going to split that dividend up. But for dividend investors, when you get those new shares, the total dividend overall should still end up being the same. One stock will probably have a higher yield, one a lower yield, but you’re still going to be getting the same amount.
Harrell: They’ll keep you whole in terms of your dividend payout.
Sekera: Exactly. Still, a 5-star rated stock, trades at over a 50% discount to fair value. So again, still another one where in the food sector overall, a lot of those companies have been under margin pressure. Essentially, they’re seeing volumes under pressure quite a bit, still trying to raise their prices to catch up with where inflation has been the past couple of years. But over time, as those margins normalize, we expect that the intrinsic value on those stocks continue to keep moving up as well.
Harrell: Got it. And the next is an energy firm, Energy Transfer ET.
Sekera: Exactly. So, 4-star rated stock trades at a 20% discount to fair value. Really, no change in our investment thesis on that one as well. But I’ve seen over the past year, with oil prices still kind of around that $60 a barrel basis. That’s been coming down over several years in a row now. Just some negative market sentiment in that market overall, which is, I think, kind of kept this stock under pressure as well. I would just note that for a company like this, as an MLP, they’re getting paid for the amount of volume going through, as opposed to what the price on the underlying is. So, again, no change to the investment thesis. We still find this one to be pretty darn attractive.
Harrell: And just for tax purposes, investors should know it is a master limited partnership.
Sekera: Exactly.
Harrell: OK. And you have two REITs on your list. And the first is pretty obvious what it is, Healthpeak DOC, healthcare REIT.
Sekera: Healthpeak, also a 5-star rated-stock, trades at a very deep discount to fair value, about 40%, over 7% dividend yield. Now, in the REIT sector, real estate overall, it’s actually the most undervalued sector, according to our evaluations today. It’s really been a laggard overall for quite a while now. Now, personally, within the real estate sector, I prefer steering clear of urban office space. I still don’t like the risk/reward dynamics there, but we see a lot of value in REITs, specifically those that have more defensive-oriented characteristics. In this case, medical office buildings, physician offices, research development facilities, laboratories, and so forth. So I think this one’s still really interesting for investors. I think what’s been holding this stock back is, in that space, real estate investors have really been looking for REITs that have more organic growth than what we’ve been seeing in this story. But based on the assets that this company has and our valuations, still looks very undervalued today.
Harrell: And the second REIT is Realty Income O.
Sekera: So, 5-star-rated stock, trades at a 20% discount to fair value. I think the dividend yield’s about 5.5%. Now, with this company, they have a very diversified portfolio, over 15,000 different locations, most of them freestanding, more often than not, more defensive-type retailers. I think a lot of investors may steer clear of this one because they don’t want that type of retail exposure in their portfolio. I think there’s enough diversification in here that I’m not worried about it, especially because they are more defensive in nature. So, another one I think investors should be taking a look at today.
Harrell: OK, great. And I just point out, both Healthpeak and Realty Income pay a monthly dividend, which in and of itself doesn’t increase the yield, But it does smooth out the income over the year, as opposed to quarterly payments, where your portfolio can have a little bit of lumpiness in when the dividends are coming in. And then you have a couple that you’re just going to do a one-for-one swap, one stock for another within the same sector. And the first is Duke DUK.
Sekera: I would recommend swapping Duke out. So, that would be the buy. And then Portland General POR, which is one we had recommended in the past. It’s just a matter of the stock price on Portland General has done very well. I believe it’s up over 20% since we had recommended it. Duke stock has lagged. In this case, with that swap, you actually give up a little bit of dividend yield, but Duke is trading at a deeper discount to fair value. So, I like that pickup. But then also when I look at the characteristics of this company and look at Duke, we think that Duke probably has better constructive or more favorable regulatory environments for shareholders. Plus, where it’s situated, I think that when you look at AI, the demand and how that’s increasing for electricity. Duke is going to be better positioned than Portland General to be able to grow with that demand over the next three to five years.
Harrell: You’re also swapping out one utility for another, adding Alliant LNT and moving Eversource ES out.
Sekera: This is another one. Alliant trades at a little bit more of a discount, gives up a little bit of yield, but you’re buying it at a 7% discount, 4-star-rated stock, 3.1% dividend yield. Somewhat similar story. I think you’re better positioned in the geographic areas that they’re in. They do have better exposure to that longer-term demand growth for electricity from artificial intelligence.
Harrell: And then the three others that you’re going to remove from your recommendation list. The first is UPS UPS.
Sekera: UPS, just between how much that stock had moved up from when we recommended it. Unfortunately, we have actually cut our fair value a little bit on that one as well. So at this point, it’s moved into that 3-star territory. Taking a look at the fundamentals of the company this year, looking at their free cash flow, they may or may not have enough free cash flow to be able to cover that dividend. So, for now, our analyst thinks they’re still more likely than not to keep their dividend steady at this point. But there’s definitely risk this year as far as whether or not they may cut that dividend. And especially if the economy were to take a turn for the worse this year or in the next year. I think that dividend risk is probably more than what I think most dividend investors would prefer to have in their portfolio today.
Harrell: I think the Morningstar analysts said they weren’t explicitly modeling a dividend cut, but at the same time, they wouldn’t be surprised if one happened.
Sekera: Exactly.
Harrell: And the second is KeyCorp KEY.
Sekera: So with KeyCorp, it’s just really a matter of that stock has moved up over 30% since we initially recommended it, puts it well into 3-star territory. Fundamentally, everything still seems to be going very well. So, I don’t have a problem with it from that perspective. For those of you that maybe purchased it, still happy with the dividend that you’re getting today. Not necessarily a reason to sell it at that 3-star, indicating fair value, but no longer undervalued, which is what we’re looking for.
Harrell: The third is a stock with a very attractive yield of over 11%, but that could be a cause for concern. And that’s Lyondell LYB.
Sekera: Exactly. And I think when we’ve talked about Lyondell in the past, I told investors, this is one you’re going to want to put into your more speculative bucket. It is a commodity-oriented company. It’s going to have a lot of volatility in its underlying business. And I think we probably would have preferred to see the company’s performance do better than what they’ve done last year. This is another one now where I wouldn’t be surprised to see a dividend cut. It’s certainly more at risk. So, if you’re looking really at the dividend here to support your investment thesis, I’m very cautious about whether or not they’re going to be able to keep that, especially if we were to see any kind of downturn, not only in the US but globally as well. And China is one area where I’m very concerned about the rate of deceleration in their economy might be picking up steam. So again, very cautious on this one. And I would say, for most investors, if they’re really focused on that dividend, just know there’s a pretty good risk in that one today.
Harrell: OK. And to replace those three, you have three new names. And the first is Mondelez MDLZ.
Sekera: Mondelez is currently rated 5 stars, has over 3% dividend yield, trades at a pretty deep discount to fair value. In fact, our sector directors just added this one to our outlook best picks lists. I think this is definitely one for investors to take a look at. Now, what I’m hearing from a lot of investors today is that with the US markets at all-time highs, no matter how you look at valuations, they’re certainly stretched, certainly very high at this point, in a lot of cases, justifiably so. A lot of people are looking for more international exposure. And I think this is one way that you can get that international exposure, specifically in emerging markets, without necessarily having to buy emerging-market risk in and of itself.
Harrell: So, you’re buying a US firm that has that exposure.
Sekera: Exactly. I think about 40% of their revenue is in the faster-growing emerging markets. That’s almost double a lot of the other US food companies. So again, I think this is a good way that you can get that emerging-market exposure without necessarily going deep into the emerging markets and buying those stocks in and of themselves, which, of course, are going to have much higher risk profiles than a lot of US stocks.
Harrell: Your next name is actually a dividend aristocrat, and that’s Clorox CLX.
Sekera: Clorox is rated 5 stars. Again, trades at a very deep discount to fair value. And I’d actually say this is a pretty rare opportunity for investors. If you look at our price/fair value metric over the past decade, there’s really only been a couple of other instances we’ve seen it trade into 5-star territory. Now, I took a quick look at the model on this one before we came down. And I think our top-line growth forecast is pretty modest. Over the next five years, we’re only averaging in 1.3% compound annual growth rate. Now, the margins have been under pressure the past couple of years, similar to a lot of these other names in food and consumer packaged goods. They’ve had a tough time raising their prices as fast as their own cost of goods sold because of inflation. But over time, they will get those price increases. They will get back to more normalized margins, which is what the market’s not pricing in today. That’s what we think the market is missing. So again, I think this is a good rare opportunity for investors to be able to get that deep discount to fair value, a company with a wide economic moat, and a dividend yield at 4.6% today.
Harrell: OK. And your last recommendation is another energy firm, Devon Energy DVN.
Sekera: So, Devon Stock is currently rated 4 stars, trades at about a 30% discount to fair value, but its dividend yield isn’t nearly as high as what we’ve been talking about, as far as its fixed dividend yield.
Harrell: Well, there’s a story there we can get to.
Sekera: Exactly. And I think that’s what I really like about this one today. Now, when I look at Devon, it is in the US as more of a domestic provider. It doesn’t have the international exposures like an Exxon, which has historically been our go-to pick for oil and gas. What I would note is that it does have a narrow economic moat. That narrow economic moat is going to be based on its cost advantage. So with Devon, I also like that there’s a little bit of a floor here. So, the stock has been hit hard; a lot of these US producers have been hit hard. Oil prices have been sliding over the past couple of years. But when we look at where the plays are for this one, and we think about how that might fit in with some of the global majors, I think that if the stock were to trade down too much more, this one actually could be a pretty attractive takeover candidate for one of the global majors.
Harrell: Got it. And the story with the dividend here is that I think back in 2021, some of the energy exploration and production companies introduced this idea of a variable dividend because their cash flow is so dependent on commodity pricing. And Devon was one of the first to do that. I believe, so they kept their regular dividend, but then they also added on a variable component. They paid the variable component for 15 quarters straight. But the last one, I think, was the Sept. 24 payout. So since then, it’s just been the regular dividend, which is that lower yield that you mentioned at the top. But depending on oil prices, you see that variable component might return.
Sekera: Exactly, which I also think helps give you maybe a little inflation protection in your portfolio. If we were to see inflation run up much higher again, oil prices start going up, that does give you some more upside potential in the dividend. Plus, the stock does trade at a pretty deep discount to our long-term intrinsic valuation.
Harrell: Got it. Well, thanks for your insight, as always. And we’ll check back in six months, if that works for you.
Sekera: Sounds great. Talk to you then.
Harrell: All right. I’m David Harrell with Morningstar DividendInvestor. Thanks for watching.
Watch 10 Top Dividend Stocks for 2025 for more from David Harrell and David Sekera.
