30 Undervalued Dividend Aristocrats To Buy According to Analysts

Vardah Gill

Tue, Mar 19, 2024, 6:49 AM 18 min read

Investors often grapple with the decision of whether to invest in growth stocks or value stocks. While both strategies aim to enhance value for investors, they follow distinct paths. The primary distinction lies in the pricing. Growth stocks tend to be pricier, with high valuations relative to their sales or earnings. Conversely, value stocks are more affordable, with lower stock prices in comparison to their sales or earnings. Over time, both growth and value investment approaches have demonstrated comparable performance, yet historical analysis indicates that value investing has been more advantageous for investors in the long term. According to research published by Josef Lakonishok, Andrei Shleifer, and Robert W. Vishny in the Journal of Finance, value strategies tend to yield superior returns. Various investment strategies centered around purchasing undervalued stocks have consistently outperformed those focused on trendy or high-flying stocks from April 1968 to April 1990.

The research paper also emphasized that value stocks typically offer significantly higher dividend yields and possess stronger fundamental ratios compared to growth stocks. Both Josef Lakonishok and the value investing expert David Dreman have observed that value investing outperforms growth investing approximately 70% of the time, regardless of the size of the companies involved. Their studies, which encompassed various company sizes, revealed that value stocks consistently delivered average returns of slightly over 7% per year higher than growth stocks over extended periods.

As mentioned earlier, dividends are often a key component of value stocks. Among dividend strategies, one of the most popular approaches is investing in dividend aristocrats. The S&P 500 Dividend Aristocrats index tracks the performance of companies within the S&P 500 that have consistently increased their dividends for at least 25 consecutive years. A report from S&P Dow Jones Indices indicated that strategies focusing on generating income often exhibit significant value characteristics. Investors typically gravitate towards securities offering high dividend yields and lower price multiples. The report also mentioned that the S&P 500 Dividend Aristocrats index demonstrated a blend of both growth and value traits, rather than a pronounced bias towards one style. Analysis of the index composition from 1999 to 2022 revealed its style breakdown. On average, the index maintained a 59.04% exposure to value stocks and a 40.94% exposure to growth stocks during this period.

Despite the allure of high-priced growth stocks, value stocks have consistently proven to be advantageous for investors over the long haul. Dimensional Funds conducted an analysis spanning nearly a century, affirming that value stocks typically offer higher expected returns. While there have been occasional downturns, the fundamental principle that lower relative prices correlate with higher expected returns remains steadfast. Value premiums have often manifested swiftly and significantly. For instance, in years when value outperformed growth, the average premium amounted to nearly 15%. On average, in the US, value stocks have outperformed growth stocks by 4.4% annually from 1927 to 2022.

Walmart Inc. (NYSE:WMT), Emerson Electric Co. (NYSE:EMR), and Abbott Laboratories (NYSE:ABT) are some of the best dividend aristocrat stocks that are grabbing investors' attention. In this article, we will discuss undervalued dividend stocks.

30 Undervalued Dividend Aristocrats To Buy According to Analysts

Photo by nick chong on Unsplash

Our Methodology:

For our list, we first scanned the S&P 500 Dividend Aristocrats group of stocks, which are the companies that have raised their dividends for 25 consecutive years or more. From this group, we identified 30 stocks with price-to-earnings (P/E) ratios of under 35, as of March 16. A low P/E ratio typically indicates that the company's stock price is relatively low compared to its earnings per share (EPS). We then ranked these stocks according to their average analyst ratings from Yahoo Finance, where a lower score signifies a better rating. The "Recommendation Rating" is a way to assess stocks. It uses a scale from 1 to 5, with each number indicating a different recommendation:

Strong Buy
Buy
Hold
Underperform
Sell

From this ranking, we selected the stocks with scores of 2.5 or less.

We also measured hedge fund sentiment around each stock according to Insider Monkey’s database of 943 funds as of Q4 2023. The stocks are ranked in ascending order of their dividend yields, as recorded on March 12. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here).