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Add these names to your watchlist of dividend-growth stocks.

00:00 Introduction

00:41 Microsoft MSFT

01:25 Stryker SYK

02:18 Apple AAPL



Susan Dziubinski: I’m Susan Dziubinski with Morningstar. We often peek into the portfolios of highly rated fund managers looking for investment ideas.



Today, we’re taking a look at the top three holdings of Vanguard Dividend Growth VDIGX. The fund earns Morningstar’s top Medalist Rating of Gold. The fund is subadvised by Wellington Management, with Peter Fisher as lead manager. Fisher and his team believe dividend growth is the great revealer in equity investing: Only companies that are truly operating well can grow dividends more than 8% annually long term, which is what they’re looking for.



So, what dividend-growth stocks do Fisher and his team have the most confidence in, as measured by their weightings in the portfolio?



The fund’s top holding as of its most recent portfolio was Microsoft. Microsoft has typically maintained a conservative balance sheet and generates more than enough free cash flow to fund growth, pay dividends, buy back shares, and execute its acquisition strategy. Morningstar expects dividends to grow in line with earnings. We model a five-year compound annual growth rate for revenue of about 13%. We assign Microsoft a wide Economic Moat Rating and expect the company to remain competitive for two decades or more, and we also think its investments in artificial intelligence will allow Microsoft to strengthen that moat all the more. We think Microsoft is worth $490 per share.



The fund’s number-two holding is Stryker. The company designs, manufactures, and markets a variety of medical equipment, instruments, consumable supplies, and implantable devices. Morningstar thinks Stryker has carved out a wide economic moat, with the orthopedic segment as Stryker’s moatiest division because of significant switching costs for surgeons. We feel that distributions to shareholders remain mixed, mainly because we think the dividend could be higher. We recognize that management has made acquisition its top priority, which may have pushed the dividend to the back burner. Nonetheless, considering Stryker’s size and the levels of cash it generates, the firm could maintain a larger dividend. Having said that, the company has the room to grow its payout. We think Stryker stock is worth $260 per share, and it looks overvalued to Morningstar today.



The fund’s number-three holding is Apple, which management took a new position in this year. Morningstar recently raised its fair value estimate on the shares of wide-moat Apple to $185 from $170 after raising our medium-term iPhone revenue forecast. We’re forecasting double-digit iPhone revenue growth in fiscal 2025 and another strong year of revenue growth in fiscal 2026 as users upgrade their iPhones to take advantage of Apple’s generative AI features. Apple’s balance sheet is robust, and the company routinely sends its free cash flow to shareholders through dividends and share buybacks. Unfortunately, we think Apple stock looks overvalued today.



For more stock ideas, be sure to subscribe to Morningstar’s channel and visit Morningstar.com.



Morningstar senior analysts Todd Trubey, Debbie Wang, and Dan Romanoff and analyst William Kerwin provided the research behind this segment.



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