There’s often an intersection between the value factor and dividend stocks — a scenario that’s being amplified in 2022.
It’s a good thing, too, because many dividend-focused exchange traded funds are outperforming the broader market. For example, the VanEck Morningstar Durable Dividend ETF (DURA) is modestly higher this year while the S&P 500 is saddled with a year-to-date loss of 16.57%.
“Dividend stock investors have enjoyed a pleasant surprise in 2022: Although many expected stable dividend stocks to slump as interest rates rose and bond yields became more attractive, dividend stocks have remained remarkably resilient,” wrote Morningstar analyst Susan Dziubinski.
DURA follows the Morningstar US Dividend Valuation Index, which is built to identify high-yielding, financially healthy companies. The latter point is critical because the history of financial markets is littered with examples of big dividend yields being tied to companies that cannot afford those obligations. As such, those firms often become dividend offenders in the name of conserving cash, which sends the shares lower.
For its part, DURA is home to a variety of stocks with favorable dividend growth traits, above-average yields, the resources to support those payouts, and attractive valuations. That’s a compelling combination in any environment.
Among durable dividend payers in DURA that are now attractively valued is Dow component and telecom giant Verizon Communications (NYSE:VZ). That’s the ETF’s ninth-largest holding at a weight of 4.35%.
“Verizon is clearly a cheap stock, trading a whopping 37% below our fair value estimate of $59. We think the market is overly focused on Verizon’s challenges to add postpaid consumer wireless customers, says Morningstar director Mike Hodel,” added Dziubinski.
Tech giants Broadcom (NASDAQ:AVGO) and Cisco Systems (NASDAQ:CSCO), both of which have impressive histories of payout growth, are also among the DURA holdings that Morningstar views as inexpensive. Those stocks, both of which are top 10 holdings in the ETF, combine for 10% of the fund’s roster.
“We think Cisco stock is worth $54 per share; shares currently trade about 9% below that. The dominant force in enterprise networking, Cisco maintains leading market shares across switching, routing, and wireless access, observes Morningstar analyst William Kerwin,” according to Dziubinski.
Other DURA member firms seen as undervalued by Morningstar include medical device giant Medtronic (NYSE:MDT) and Dominion Energy (NYSE:D). Public Service Enterprise Group (NYSE:PEG), another utility and also a DURA holding, is also part of that group.
The ETF allocates over half its weight to healthcare and financial services equities.
For more news, information, and analysis, visit the Beyond Basic Beta Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.