Key Takeaways
- A recently published list of top dividend stocks reveals a heavy bias towards the Energy and Healthcare sectors, suggesting a defensive, value-oriented posture designed for an uncertain macroeconomic environment.
- Analysis beyond headline yield is critical; metrics like payout ratios and free cash flow coverage expose significant differences in dividend sustainability among the selected companies, particularly within the energy cohort.
- The list constructs a classic “barbell” portfolio: cyclical energy names are balanced against non-cyclical healthcare and consumer staples, aiming to capture upside while hedging against a downturn.
- While offering stability, the portfolio has notable factor exposures, including a significant lack of technology and growth-oriented names, which could lead to underperformance in a risk-on market.
- The key differentiator for long-term performance may not be yield, but rather dividend *growth*, where companies like Merck and Mondelez show superior compounding potential compared to high-yielding but slower-growing peers.
The regular publication of curated “best dividend stock” lists offers a useful snapshot of institutional thinking, and a recent selection from Morningstar provides a particularly interesting lens through which to view market sentiment. The list is heavily concentrated in two sectors, Energy and Healthcare, suggesting a clear strategic tilt towards value and defensiveness. However, a deeper analysis of the constituent companies reveals that not all dividends are created equal, and the sustainability of their payouts varies considerably, demanding a more granular assessment than headline yields alone can provide.
A Portfolio of Barbell Defensives
At a high level, the selected stocks represent a classic barbell strategy. On one side, you have cyclical energy companies like ExxonMobil, ConocoPhillips, Schlumberger, and Oneok, positioned to benefit from sustained commodity prices and global energy demand. On the other, you have non-cyclical stalwarts from Healthcare (Johnson & Johnson, Merck, Medtronic) and Consumer Staples (PepsiCo, Mondelez), which typically offer resilience during economic slowdowns. Lockheed Martin stands somewhat apart as a defence industrial, its fortunes tied more to geopolitical currents and government budgets than to the broad business cycle.
This construction is implicitly a bet on persistent economic uncertainty. It seeks to balance the inflation-hedging characteristics of energy with the defensive stability of healthcare and consumer goods. While logical, it creates a portfolio with very specific factor exposures: long value, long quality, and short growth. For an investor, this means the portfolio is structured to perform well in a stagflationary or mild recessionary environment but would likely lag in a market rally led by technology or high-growth sectors.
Deconstructing the Dividend Quality
A dividend’s appeal rests on its sustainability and potential for growth, not just its current yield. Examining metrics beyond the headline figure reveals a wide divergence in quality across this list. A high yield supported by dangerously high payout ratios or weak free cash flow is often a precursor to a dividend cut, turning a supposed income stream into a capital loss.
The table below expands on the basic dividend data to include the trailing twelve-month (TTM) payout ratio, which measures the proportion of earnings paid out as dividends. A ratio consistently above 80% can be a warning sign, while a lower figure suggests a greater capacity to sustain and grow the payout, even if earnings falter.
| Company | Sector | Forward Yield (%) | 5-Year Dividend Growth (CAGR, %) | Payout Ratio (TTM, %) |
|---|---|---|---|---|
| ExxonMobil (XOM) | Energy | 3.3% | 2.1% | 41.5% |
| ConocoPhillips (COP) | Energy | 3.1% | 14.9% | 34.2% |
| Schlumberger (SLB) | Energy | 2.3% | -11.8% | 37.3% |
| Oneok (OKE) | Energy | 4.8% | 3.0% | 82.1% |
| Johnson & Johnson (JNJ) | Healthcare | 3.2% | 5.7% | 60.8% |
| Merck (MRK) | Healthcare | 2.4% | 9.9% | 50.4% |
| Medtronic (MDT) | Healthcare | 3.4% | 7.6% | 66.9% |
| PepsiCo (PEP) | Consumer Defensive | 3.2% | 6.5% | 72.5% |
| Mondelez (MDLZ) | Consumer Defensive | 2.6% | 10.7% | 51.3% |
| Lockheed Martin (LMT) | Industrials | 2.7% | 8.0% | 47.2% |
Data sourced from Morningstar as of late 2024. Payout ratios are approximate and can vary based on calculation methodology. Schlumberger’s negative 5-year growth reflects a significant dividend cut in 2020.
The data immediately highlights points of concern. Oneok’s high 4.8% yield is offset by a very high payout ratio of over 80% and anaemic recent growth, suggesting its dividend is less secure than its peers. Similarly, PepsiCo’s payout ratio is creeping into the cautionary zone. In contrast, ConocoPhillips and ExxonMobil exhibit strong coverage with payout ratios comfortably below 50%, a testament to the capital discipline that has become prevalent among the energy supermajors. Schlumberger’s inclusion is curious, given its dividend was slashed during the pandemic, resulting in a deeply negative five-year growth rate; its selection is clearly a forward-looking bet on the energy services cycle, not a backward-looking assessment of reliability.
Within the defensives, Merck and Mondelez stand out. They combine respectable yields with strong double-digit dividend growth and sustainable payout ratios around 50%. This profile is arguably the most attractive for a long-term compound-growth investor, prioritising future income growth over immediate yield.
Forward-Looking Implications and a Hypothesis
This list serves as a solid foundation for investors seeking defensive income but should not be adopted wholesale without scrutiny. The real takeaway is the methodology it implies: focus on sectors with structural tailwinds (energy security, demographics) and then filter for companies with robust cash flows and disciplined capital allocation. The quality of the dividend, measured by its coverage and growth potential, is paramount.
A speculative hypothesis flows from this: the market’s current narrative rewards energy companies for capital discipline, reflected in their healthy payout ratios. However, this discipline will face its greatest test not in a deep recession, but in a prolonged period of range-bound commodity prices (e.g., oil trading between $70-$85). In such a scenario, the integrated majors like ExxonMobil, with their diversified downstream and chemical operations, will demonstrate superior cash flow stability compared to pure-play service providers like Schlumberger or infrastructure operators like Oneok. By the end of 2025, I would expect the dividend quality and stock performance of integrated energy firms to have meaningfully diverged from their more specialised peers, proving that in a flat market, business model resilience trumps cyclical exposure.
References
1. Morningstar. (2024). The 10 Best Dividend Stocks to Buy for 2025. Retrieved from Morningstar investment analysis and stock screener results.
2. @dividendology. (2024, October). [List of 10 best dividend stocks from Morningstar]. Retrieved from https://x.com/dividendology/status/1929562451990700353
