9 Top Dividend Stock Picks

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar.com. As the year comes to a close, we decided to pull together some of our best dividend-stock ideas from the past few months. First, we'll take a look at the yield-rich utilities sector. The sector is pricey. But we do think there are some good yield plays.

Travis Miller: Utilities are a sector that investors often turn toward for yield, but we also think that investors should be cognizant of valuations. Right now on the yield front, when you look at 10-year U.S. Treasuries below 2% and the U.S. dividend yield for utilities above 3%, utilities look like an attractive yield option. However, valuations are extremely rich. Price/earnings multiples, price/book multiples are all well above three-year decade averages. Even we think the sector is well overvalued. Although it started the year at fairly valued, we think utilities are now 13% overvalued given the run that they've had in 2019.

That said, we do think there are some good yield opportunities. Industry has very good balance sheet strength, fair payout ratios, and a lot of good growth. A couple of names we like are those yielding above 4%, such as CenterPoint, Duke Energy, Edison International, and Dominion Energy. We think these utilities are well positioned to grow earnings and dividends based on the infrastructure investment needs across the U.S.

Dziubinski: Next, Big Tobacco. Although the industry is facing disruption, we think the core cigarette businesses of these undervalued firms will drive cash flow and growth.

Philip Gorham: Love them or hate them, tobacco companies pay big dividends, but it's been a rough ride this year, with the stocks more volatile than they have been in the past. And with the industry facing some disruption, now's perhaps a good time to review the sustainability of those dividends.

Disruption is coming from the emergence of new products, particularly vaping devices. In the U.S., the FDA is clamping down on the marketing of vaping products. And if the vaping category is impaired as a result of that, we would generally see that as a positive for most of the tobacco industry. It may be attracting a new consumer, but vaping is highly competitive, economic moats are almost nonexistent, and margins are much lower than those of cigarettes as a result.

So if the category goes away, the consumer that switched to vaping, and perhaps dual-users of both products, may go back to smoking cigarettes, which remains a highly profitable, multi-cash-generative business that should be able to support dividend growth. Cigarette consumption is, of course, in decline in most markets. So growth is dependent on the company's being able to offset volume declines with price increases. Most markets, we think still have headroom for multiyear price hikes, and we expect that pricing power to drive earnings growth in the low single-digit range for the next few years.

However, economic road bumps, tax increases, or marketing restrictions can all have a usually temporary impact on price elasticity. So we recommend one of the globally diverse manufacturers in order to mitigate that risk. Those global players are yielding roughly between 5.5% to 7% yields currently. Philip Morris International is probably the highest-quality business. It has the leading position in higher-margin heated tobacco, and it's yielding over 5%. British American Tobacco is similar in size. It's a bit more skewed to vaping than heated tobacco, but with a 7% yield, it also looks pretty good value.

The company with the highest dividend yield is the UK's Imperial Brands, which is yielding 11%, and that's on the back of recent double-digit dividend growth and a pullback in the stock. We think this is probably the lowest-quality business of the group--it generally has weaker market positions. But while dividend growth will slow significantly to the low single digits in the near term, that 11% yield can't be ignored and the stock looks significantly undervalued.

So, while the headlines have certainly not been pretty, and there will be substitute product in some form going forward, the core cigarette businesses are chugging along reasonably well, and that should drive cash flow and dividend growth for several years to come.

Dziubinski: And lastly, we turn to the major integrated oil group. The group is largely undervalued, and we think dividends are safe.

Allen Good: We think the major integrated oil group offers a bevy of opportunities for dividend-focused investors. Currently yielding anywhere from 4% to 6.5%, the group is largely undervalued based off our assumptions. At those dividend levels, they are trading at historically high levels compared to decades ago, when they traditionally yielded anywhere from 3% to 4%. However, we do not see dividends at risk.

Subsequent to the collapse in oil prices in 2014, all these firms have done significant work in improving their operating and capital cost structure. So, now the dividends are largely safe down to oil prices are $50. Given our long-term assumption around $60 per barrel oil, we think dividends are largely safe as well.

Of the group, Shell and Total stand out with the greatest opportunity in our opinion. Shell, yielding nearly 6.5%, has grown cash flow steadily over the past eight quarters, and we expect it to continue to do so. In fact, management's current plans call to return $125 billion in dividends and share purchases during the next five years. That's nearly half its current market cap.

Total, meanwhile, is also improving cash flow. It expects to grow operating cash flow by about $1 billion per year during the next five years, thanks to growing production as well as improved downstream profitability. This growing cash flow should ultimately support dividend growth annually of about 5% to 6%. This makes their current yield of about 5.5% look much more attractive compared to peers.