3 Cheap Dividend Stocks to Buy Yielding 4% or More

David Sekera: Hi, I’m Dave Sekera, chief US market strategist with Morningstar Research Services. This week I’m filling in for Susan Dziubinski.

For investors looking for a relatively high dividend yield, that doesn’t mean you have to give up looking for stocks that trade at a discount to their intrinsic valuation.

3 Cheap Dividend Stocks to Buy Yielding 4% or More

1. Verizon Communications VZ
2. Kinder Morgan KMI
3. WEC Energy WEC

For example, Verizon Communications is rated 4 stars, trades at an approximate 25% discount to our fair value estimate, and its dividend provides investors with an almost 6.7% yield. We rate the company with a narrow economic moat based on its cost advantages and the industry’s efficient scale characteristics.

Following consolidation within the industry over the past several years, we expect that wireless carriers will begin to act more like an oligopoly. What this means is that they will compete less on price, which in turn will allow Verizon to expand its operating margin and profitability. In fact, we think we are already seeing the initial stages of this transformation in Verizon’s most recent earnings report.

Verizon’s forward P/E ratio is just under 9 times our 2024 earnings forecast, and we forecast Verizon’s earnings will grow 6.5% on average over the next three years. With a dividend payout ratio below 60%, we don’t foresee any difficulty with Verizon being able to maintain its dividend.

Another example is Kinder Morgan. That’s a master limited partnership with 82,000 miles of natural gas and oil pipelines. Based on the inherent efficient scale and locations of their pipelines, we rate the company with a narrow economic moat.

The stock is rated 4 stars and trades at a little over a 10% discount to our intrinsic valuation, and its dividend yield is about 6%.

Approximately 64% of the company’s revenue is tied to natural gas, 26% to refined products, and 10% to carbon dioxide. In our longer-term forecast, we project the demand for oil and refined products will rise through the end of this decade and then only slowly start to decline thereafter as electric vehicles become a larger percentage of cars on the road. Offsetting this long-term decline, we foresee an increase in demand for natural gas to power greater electricity usage as an increase in artificial intelligence requires many times more electricity than traditional computing.

Kinder Morgan’s forward P/E ratio is approximately 14 times our 2024 earnings forecast, and we forecast its earnings will grow about 10% on average over the next five years.

And lastly is WEC Energy, a utility company that provides regulated electricity service in Wisconsin and Illinois. And it also provides regulated natural gas service in Wisconsin, Illinois, Michigan, and Minnesota.

Its stock is rated 4 stars and trades at approximately a 16% discount to our intrinsic valuation. Currently, its dividend yield is just over 4%. Like most regulated utilities, we rate WEC with a narrow economic moat.

In our view, we think WEC combines best-in-class management with above-average growth opportunities and is supported by a constructive regulatory environment in Wisconsin. We also think WEC is well positioned to capitalize on the expansion of data centers to support the growth in artificial intelligence computing.

Looking forward, we expect WEC Energy will achieve the high end of their 6.5% to 7.0% annual earnings growth guidance range through 2028.

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Watch 2 Wide-Moat Stocks to Consider for more from this series.