Morningstar's top 10 dividend stocks, including Pepsi

Dividend stocks offer an attractive investment opportunity in times of market turmoil. They often provide regular – hopefully rising – income and the potential for capital gains.

Dividend stocks are responsible for a sizable portion of the stock market’s total return for the long term.

The annualized return of the S&P 500 over the last 50 years, including dividends, registered 10.63%, according to Moneychimp’s calculations. Excluding dividends, the total is 7.52%. That’s a significant difference for one year, let alone 50.

Stocks with rising dividends (dividend-growth stocks) are particularly appealing. Not only do you receive higher payouts each year, but a company’s ability to increase dividends often signals its finances are strong.

Dividend stocks can represent a safe haven during periods of market volatility TheStreet

Morningstar’s guide to choosing dividend stocks

Morningstar, perhaps the most respected research firm serving retail investors offers some tips for choosing dividend stocks.

“It’s really critical to be selective when buying dividend-paying stocks and chasing yield,” says Dan Lefkovitz, a strategist for Morningstar Indexes.

“Looking for the most yield-rich areas of the market can often lead you into troubled areas and dividend traps — companies that have a nice-looking yield that is ultimately unsustainable. You have to screen for dividend durability and reliability going forward.”

David Harrell, editor of Morningstar DividendInvestor, recommends opting for companies with durable competitive advantages: moats.

“A moat rating does not guarantee dividends, of course, but we have seen some very strong correlations between economic moats and dividend durability,” Harrell says.

But it’s more than moats alone.

“Given ongoing economic uncertainty and stock market volatility, investors looking for the best dividend stocks might consider adding undervalued, quality dividend stocks to their portfolios,” writes Morningstar investment specialist Susan Dziubinski. Quality stocks are those with strong fundamentals.

“After all, quality companies have the financial stability to maintain their dividends during questionable economic periods, and price risk is reduced when investors can buy the stocks of these companies on the cheap,” she says.

Morningstar’s top 10 dividend stocks

Using the criteria above Morningstar chose the “10 best dividend stocks to buy.” Here they are, in alphabetical order, including Morningstar commentary about three of them.

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1. Altria Group  (MO) – Get Free Report, the tobacco titan: Morningstar moat rating, wide. Morningstar fair value estimate, $52. Friday price quote is $40.35. Forward dividend yield, 9.69%.

“Altria is the leading tobacco manufacturer in the U.S.,” its only market, writes Morningstar analyst Philip Gorham. “It is logical that Altria is pursuing a multiprong approach to cigarette substitutes.”

2. Bristol-Myers Squibb  (BMY) – Get Free Report, the big drug company: Morningstar moat rating, wide. Morningstar fair value estimate, $63. Friday price quote is $50.05. Forward dividend yield, 4.79%.

3. Comcast  (CMCSA) – Get Free Report, the telecommunications/media giant: Morningstar moat rating, wide. Morningstar fair value estimate, $60. Friday price quote is $43.05. Forward dividend yield, 2.73%.

4. Exxon Mobil  (XOM) – Get Free Report, the oil and gas behemoth: Morningstar moat rating, narrow. Morningstar fair value estimate, $123. Friday price quote is $96.75. Forward dividend yield, 3.93%.

5. Gilead Sciences  (GILD) – Get Free Report, the biotechnology stalwart: Morningstar moat rating, wide. Morningstar fair value estimate, $97. Friday price quote is $87.45. Forward dividend yield, 3.47%.

“Gilead generates stellar profit margins with its HIV and hepatitis C virus (HCV) portfolio, which requires only a small salesforce and inexpensive manufacturing,” writes Morningstar analyst Karen Andersen.

“But Gilead needs HCV market stabilization, strong continued innovation in HIV, solid pipeline data, and smart future acquisitions to return to growth.”

6. Medtronic  (MDT) – Get Free Report, the massive medical device company: Morningstar moat rating, wide. Morningstar fair value estimate, $112. Friday price quote is $86.60. Forward dividend yield, 3.2%.

7. NextEra Energy  (NEE) – Get Free Report, the utility/clean energy company: Morningstar moat rating, narrow. Morningstar fair value estimate, $74. Friday price quote is $57.10. Forward dividend yield, 3.24%.

8. PepsiCo  (PEP) – Get Free Report, the beverage and snacks company: Morningstar moat rating, wide. Morningstar fair value estimate, $180. Friday price quote is $166.35. Forward dividend yield, 2.96%.

9. Verizon Communications  (VZ) – Get Free Report, the telecommunications company: Morningstar moat rating, narrow. Morningstar fair value estimate, $54. Friday price quote is $39.25. Forward dividend yield, 6.83%.

10. Wells Fargo  (WFC) – Get Free Report, the large bank: Morningstar moat rating, wide. Morningstar fair value estimate, $55. Friday price quote is $47.80. Forward dividend yield, 2.88%.

“Wells Fargo remains in the middle of a multi-year rebuild,” write Morningstar analysts Michael Wong and Eric Compton. But, “we’re already getting glimpses of the transition to offense from defense,” with an increase in internal investments and other developments, they say.

The author owns shares of Comcast, Exxon, Medtronic, NextEra, Pepsi and Verizon.