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Morningstar’s best ideas for those who love dividends

What are those who invest in high dividend stocks looking for? Definitely a coupon you can count on in the future and a possibly generous yield. For these reasons we have selected the European companies that in the last five years have never reduced the dividend in favor of shareholders and among these we have chosen those that have an Economic moat (the starting sample are the holding companies included in the basket of the Morningstar DM index. Eur). The reason we applied this second screening filter is that companies with quality businesses have proven to be better able to withstand market turbulence and exogenous shocks, such as the pandemic.

Among these securities we have included in our list only those traded at a discount on the market, i.e. with a Morningstar rating of 4 or 5 stars. This choice goes in the direction of avoiding the risk of falling into the dividend trap, that is to invest in a stock because attracted by a consistent and apparently reliable dividend and then end up with shares that stop paying the coupon and depreciate compared to the price at which have been purchased. Below is the list of the 15 stocks with the highest dividend yield (calculated on dividends paid in the last 12 months) among those that meet our selection criteria.

Basf
Basf is the largest chemical company in the world and competes in almost all major product categories. About half of sales are generated in Europe, although investment is largely concentrated in the fastest growing emerging markets, and end markets are widely diversified across industry, energy, transport, consumer goods and agriculture. The German company recently entered the seed business through the acquisition of the businesses divested from Monsanto as part of the merger with Bayer and, although no cost synergies are expected, analysts believe BASF has successfully seized a rare opportunity to gain critical mass in the attractive seed market.

The company has always managed to increase the coupon in favor of shareholders over the past five years. In addition, the stock offers an 8% dividend yield and is traded at a discount rate of over 30% compared to the fair value of 62 euros (report updated as of July 27, 2022).

Zurich Insurance Group
Zurich Insurance Group is an insurance company active in the non-life and life divisions, as well as services for companies in the agricultural sector. Morningstar analysts recognize Zurich Insurance as an Economic moat to an average extent due to its specialization in less standardized product lines such as hedging special risks, or meeting the needs of particular businesses or economic sectors. In this way, the company manages to escape the need to compete on price and achieve profit margins above the industry average.

The estimated fair value of 500 Swiss francs translates into a valuation of the company equal to 14 times the expected earnings for 2022. The stock is currently trading at a discount rate of 15% and offers a yield of 5.13. %.

Holcim
The merger between Lafarge and Holcim in 2015 created the largest building materials manufacturer and allowed the latter to gain significant exposure to emerging markets. Analysts welcome management’s divestment and cost-cutting operations following the acquisition, as they have enabled Holcim to strengthen its balance sheet and protect its best profit margins. The outlook for the sector is encouraging: the resumption of large infrastructure projects and investments that remained on standby during the pandemic produced a strong demand surplus compared to the supply of many materials, which resulted in a significant increase in their price. .

The stock trades at a discount rate of 20% compared to the fair value of 56 Swiss francs and offers shareholders a dividend yield of 4.94%.

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