4 Must-Own Dividend-Growth Stocks

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These dividend stocks are among the top-10 holdings of two of the best fund managers.

00:00 Introduction

01:02 Microsoft MSFT

01:35 Broadcom AVGO

02:06 Apple AAPL

02:35 Visa V

Susan Dziubinski: I’m Susan Dziubinski with Morningstar. We often peer into the portfolios of highly rated fund managers to find new stock ideas. Today, we’re talking about four dividend stocks that are heavily weighted in two of the best dividend-growth funds around. Those funds are Vanguard Dividend Growth VDIGX and T. Rowe Price Dividend Growth PRDGX. Both funds earn Gold Morningstar Medalist Ratings, which means that they’re among the best funds in their categories.

The managers of these funds don’t invest in the highest-yielding stocks they can find. Instead, they favor the stocks of high-quality companies that are financially healthy enough to grow their dividends over time. So, the stocks that we’ll talk about today don’t offer shoot-out-the-lights yields. Instead, they’re the stocks of cash-flow-rich companies that are likely to consistently increase their dividends in the future.

The two managers have four of the same stocks in their top 10 holdings. These stocks aren’t all buys today, according to Morningstar, but they are must-own dividend-growth stocks when you can buy them below their fair values.

The first must-own dividend stock from the portfolios of these managers is Microsoft. Microsoft is one of the few public cloud providers that can deliver a wide variety of platform-as-a-service and infrastructure-as-a-service solutions at scale. Microsoft has carved out a wide economic moat thanks to high switching costs, the network effect, and cost advantages. We think management has done an excellent job of allocating capital, and we expect dividends to grow in line with earnings. We think Microsoft’s stock is worth $600 per share.

The second must-own dividend stock is Broadcom. Broadcom is a combination of a high-value semiconductor and software business. We think Broadcom has carved out a wide economic moat, which comes from intangible assets in chip design and switching costs for its software products. We expect management to continue to focus on dividend growth, earmarking 50% of prior-year free cash flow to dividend payouts. We think Broadcom’s stock is worth $325 per share.

The next must-own dividend stock is Apple. Apple has earned a place at the forefront of the consumer electronics industry with its ecosystem of tightly integrated hardware, software, and services. The company earns a wide economic moat rating stemming from customer switching costs, intangible assets, and a network effect. We expect Apple to use its immense cash flow to return capital to shareholders. We think Apple stock is worth $210 per share.

The final must-own dividend stock is Visa. As the largest payment processor in the world, Visa still enjoys strong growth prospects. In fact, we think its position in the global electronic payment infrastructure is unassailable. Visa has carved out a wide economic moat thanks to the network effect. The company has been active in returning cash to shareholders via dividends, and we don’t expect that to change. We think Visa’s stock is worth $306 per share.

For more stock ideas, tune in to The Morning Filter each week, wherever you get your podcasts. And visit Morningstar.com.

Morningstar senior analysts Brett Horn, William Kerwin, and Dan Romanoff provided the research behind this segment.

Subscribe to The Morning Filter on Apple podcasts, or wherever you get your podcasts. https://podcasts.apple.com/us/podcast/the-morning-filter/id1792280057

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Susan Dziubinski https://www.morningstar.com/people/susan-dziubinski

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