10 Undervalued Dividend Stocks for 2026

Mid-Year Dividend Stock Check-In – David Herrell & Dave Sakara

Key Concepts:

• Dividend Yield: Annual dividend payment divided by the stock price, expressed as a percentage.
• Fair Value: Morningstar’s estimate of a stock’s intrinsic worth.
• Economic Moat: A company’s sustainable competitive advantage. (Wide, Narrow, None)
• REIT (Real Estate Investment Trust): A company that owns or finances income-producing real estate.
• MLP (Master Limited Partnership): A business structure often used in the energy sector with specific tax implications.
• Oligopoly: A market structure with a small number of firms dominating the industry.
• Intrinsic Value: An estimation of what an asset is worth based on an underlying perception of its value.
• Dividend Aristocrat: A company that has increased its dividend payout for at least 25 consecutive years.

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I. Overview & Methodology

David Herrell, editor of Morning Star’s Dividend Investor newsletter, conducts a mid-year review with Dave Sakara, Morningstar’s Chief US Market Strategist, of their January 10 dividend stock picks. The discussion focuses on performance, changes in investment theses, and swaps to the original list, aiming to identify undervalued stocks with strong dividend potential. The analysis relies heavily on Morningstar’s star ratings (1-5 stars, with 5 being the most attractive), price-to-fair value ratios, and fundamental company analysis.

II. Retained Stocks & Investment Thesis Updates

Several stocks from the original list remain strong recommendations:

• Verizon (VZ): Still a four-star rated stock trading at a 25% discount to fair value with a 7% dividend yield. The investment thesis remains unchanged. Sakara expects the wireless industry to evolve into an oligopoly (Verizon, AT&T, and T-Mobile), leading to reduced price competition and expanding margins.
• Craft Heinz (KHC): A five-star rated stock trading at over a 50% discount to fair value. Despite the company splitting into two entities by 2026, the total dividend payout is expected to remain consistent for investors, with the dividend potentially split unevenly between the new stocks. The food sector is facing margin pressure due to rising costs, but normalization is anticipated, driving intrinsic value growth.
• Energy Transfer (ET): A four-star rated stock at a 20% discount to fair value. Despite declining oil prices (around $60/barrel), the company’s business model – based on volume transported rather than oil price – remains attractive. Sakara notes it’s an MLP, requiring investors to be aware of the tax implications.
• HealthPeak Properties (HPE): A five-star rated REIT trading at a 40% discount to fair value with a 7% dividend yield. Sakara identifies the REIT sector as currently undervalued. HealthPeak focuses on defensive healthcare properties (medical office buildings, research facilities) which are preferred over urban office spaces. The stock’s undervaluation is attributed to investor preference for REITs with higher organic growth.
• Realty Income (O): A five-star rated REIT trading at a 20% discount to fair value with a 5.5% dividend yield. Its diversified portfolio of over 15,000 freestanding retail locations is considered resilient. Both HealthPeak and Realty Income offer monthly dividend payments, smoothing income streams.

III. Stock Swaps – Replacing Underperformers

Sakara recommends swapping out several stocks based on price appreciation and changing fundamentals:

• Duke Energy (DUK) for Portland General Electric (POR): While Duke offers a slightly lower dividend yield, it trades at a deeper discount to fair value. Sakara believes Duke is better positioned to benefit from increasing electricity demand driven by Artificial Intelligence (AI) and operates in more favorable regulatory environments.
• Alliant Energy (LNT) for Eversource Energy (ES): Alliant trades at a greater discount (7%) and is expected to benefit more from long-term electricity demand growth related to AI.

IV. Stocks Removed from the Recommendation List & Rationale

Three stocks were removed from the list due to performance and/or increased risk:

• UPS (UPS): The stock price has increased significantly, moving it into three-star territory. Morningstar has also lowered its fair value estimate. Concerns exist regarding the company’s ability to cover its dividend, particularly in a worsening economic climate.
• KeyCorp (KEY): The stock has risen over 30% since the initial recommendation, placing it in three-star territory. While fundamentally sound, it is no longer undervalued.
• Lionell (LION): This was always considered a speculative pick due to its commodity-oriented business. Concerns about a potential dividend cut have increased, especially given the potential for economic slowdowns and deceleration in the Chinese economy.

V. New Additions to the Recommendation List

Three new stocks were added to replace the removed ones:

• Manderly (MNDL): A five-star rated stock with a 3% dividend yield, trading at a deep discount to fair value. It’s been added to Morningstar’s “Outlook Best Picks” list. Manderly provides exposure to faster-growing emerging markets (approximately 40% of revenue) through its US-based operations, offering a less risky way to access this growth.
• Clorox (CLX): A five-star rated Dividend Aristocrat trading at a rare deep discount to fair value. Sakara believes the market is underestimating the company’s ability to restore margins after recent inflationary pressures. The current yield is 4.6%.
• Devon Energy (DVN): A four-star rated stock trading at a 30% discount to fair value. While its fixed dividend yield is lower, the variable dividend component (previously paid for 15 consecutive quarters) offers potential inflation protection and upside if oil prices rise. Sakara suggests Devon could be an attractive takeover target for a global energy major.

VI. Conclusion

The mid-year review highlights a focus on identifying undervalued dividend stocks with strong fundamentals and potential for long-term growth. Sakara emphasizes the importance of considering economic moats, industry dynamics, and potential catalysts for value realization. The swaps reflect a shift towards companies better positioned to benefit from emerging trends like AI and offering more resilient business models. The addition of Manderly and Clorox provides diversification and exposure to growth opportunities, while Devon Energy offers a potentially attractive, albeit riskier, play in the energy sector. The overall strategy remains centered on finding high-quality dividend payers trading at a discount to their intrinsic value.