Welcome to another edition of my monthly series of 10 Dividend Growth Stocks, in which I rank a selection of dividend growth stocks in Dividend Radar and present the 10 top-ranked stocks for consideration.
Dividend Radar is a weekly automatically generated spreadsheet listing stocks with dividend increase streaks of five years or more.
To rank stocks, I use DVK Quality Snapshots to obtain quality scores and sort them in descending order, breaking ties with additional metrics.
This month, I’m presenting stocks with dividend increase streaks of at least 10 years and whose current dividend yield is above the 5-year average dividend yield by at least 5%. Additionally, I screened for stocks with yields of at least 3% and 5-year dividend growth rates of at least 7%.
Screening and Ranking
The latest Dividend Radar list (dated September 18, 2020) contains 749 stocks. Of these, 416 stocks have dividend increase streaks of 10 years or more. After applying the following screens, the list was reduced to only 41 stocks:
- Current dividend yield is at least 5% above the 5-year average dividend yield
- Current dividend yield is at least 3%
- 5-year dividend growth rate is at least 7%
This month’s screens produce an elite selection of stocks. Each company increased its dividend every year since 2009 and those increases have compounded at a dividend growth rate of 7% or higher over the past five years. Additionally, each stock yields at least 3% and likely is undervalued because of screen #1.
I ranked the 41 stocks and present the 10 top-ranked stocks for consideration.
Ranking by Quality
I use DVK Quality Snapshots to obtain quality scores, sort them in descending order, and break ties using the following metrics, in turn:
- SSD Dividend Safety Scores
- S&P Credit Ratings
- Dividend Yield
Each stock’s Rank is shown in the tables that follow.
Fair Value Estimates
To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox. I also estimate fair value using the five-year average dividend yield of each stock using data from Dividend Radar. With several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.
Top 10 Dividend Growth Stocks for September
Here are this month’s top 10 dividend growth stocks in rank order:
Table created by the author based on the ranking in this article.
I own the six of this month’s top 10 dividend growth stocks in my DivGro portfolio.
The following company descriptions are the author’s summary of company descriptions sourced from Finviz.
1 • PepsiCo, Inc. (PEP) – Consumer Staples
PEP is a global beverage and food company. The company distributes beverages under well-known brands such as Pepsi, Gatorade, Mountain Dew, 7UP, and Tropicana, and food and snacks under brands such as Quaker, Lay’s, Doritos, Cheetos, and Ruffles. PEP was founded in 1898 and is headquartered in Purchase, New York.
2 • Cisco Systems, Inc. (CSCO) – Information Technology
CSCO designs, manufactures, and sells Internet protocol-based products and services. The company also delivers integrated solutions to develop and connect networks around the world. CSCO serves businesses of various sizes, public institutions, governments, and communications service providers. The company was founded in 1984 and is headquartered in San Jose, California.
3 • 3M Company (MMM) – Industrials
MMM is a diversified technology company with worldwide operations. The company has leading positions in consumer and office; display and graphics; electronics and telecommunications; health care; industrial; safety, security and protection services; transportation; and other businesses. MMM was founded in 1902 and is headquartered in St. Paul, Minnesota.
4 • The Travelers Companies, Inc. (TRV) – Financials
TRV provides commercial and personal property and casualty insurance products and services to individuals, associations, businesses, and government entities primarily in the United States. The company’s segments include Business and International Insurance, Bond & Specialty Insurance, and Personal Insurance. TRV was founded in 1853 and based in New York, New York.
5 • International Business Machines Corporation (IBM) – Information Technology
Founded in 1910 and headquartered in Armonk, New York, IBM is a global information technology (IT) company that offers consulting and application management services, IT infrastructure services, and infrastructure technologies. IBM’s Watson is a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and other computing systems.
6 • JPMorgan Chase & Co. (JPM) – Financials
JPM is a financial holding company providing investment banking, financial services, commercial banking, financial transaction processing, and asset management. With assets of about $2.6 trillion, the company serves many prominent corporate, institutional, and government clients around the world. JPM was founded in 1799 and is headquartered in New York, New York.
7 • Franklin Resources, Inc. (BEN) – Financials
BEN is a global investment management company operating as Franklin Templeton Investments. The company provides investment management and related services to retail, institutional, and high net-worth clients in jurisdictions around the world. BEN was founded in 1947 and is based in San Mateo, California with an additional office in Hyderabad, India.
8 • TD Ameritrade Holding Corporation (AMTD) – Financials
Operating as a subsidiary of The Toronto-Dominion Bank, AMTD provides securities brokerage services and related technology-based financial services to retail investors, traders, and independent registered investment advisors in the United States. The company provides its services through the Internet and investment advisors. AMTD was founded in 1971 and is headquartered in Omaha, Nebraska.
9 • DTE Energy Company (DTE) – Utilities
Founded in 1995, DTE is a Detroit-based diversified energy company involved in the development and management of energy-related businesses and services nationwide. DTE’s non-utility energy businesses are focused on natural gas pipelines, gathering and storage, power and industrial projects, and energy marketing and trading.
10 • U.S. Bancorp (USB) – Financials
Minneapolis-based USB is a financial services holding company that provides a wide range of financial services to consumers, businesses, and institutions in the United States. Its services are available through a network of more than 3,000 banking offices and a network of about 5,000 ATMs. USB was founded in 1863.
Please note that the top 10 dividend growth stocks are candidates for further analysis, not recommendations.
Key Metrics and Fair Value Estimates
Below, I provide a table with key metrics of interest to dividend growth investors, including the dividend increase streak (Yrs), the dividend Yield for a recent stock Price, and the 5-year dividend growth rate (5-Yr DGR), as well as the so-called Chowder Number (CDN).
I also provide the 5 quality indicators used in determining each stock’s quality score (Qual), as well as a fair value estimate (Fair Val.) to help identify stocks that trade at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of a recent price to my fair value estimate.
Table created by the author; includes data sourced from Dividend Radar
I color-code CDNs according to the likelihood of generating annualized returns of at least 8%. Green means likely, yellow means less likely, and red means unlikely. Green CDNs are favorable.
All of the stocks trade at discounted valuations, based on my fair value estimates.
- PEP, CSCO, and MMM are rated Excellent, the other stocks are rated Fine.
- BEN, USB, and AMTD are discounted the most.
- IBM and BEN offer the highest yields.
- JPM and AMTD have the highest 5-year dividend growth rates.
Here’s a comparative analysis of an equal-weighted portfolio of this month’s top 10 dividend growth stocks:
According to Finbox, the portfolio has a fair value upside of 13.2%. Note that its 5-year performance is quite poor when compared to that of the S&P 500 over the same period. Perhaps some of the fair value upside is related to the portfolio’s poor performance, especially since about February 2018.
Below is a chart comparing the 5-year performance of September’s top 10 stocks to that of the S&P 500. Note that not a single stock fared better than the S&P 500. BEN’s performance is particularly poor and a major drag on the 5-year performance of this month’s top 10 dividend growth stocks, when looked at as an equal-weighted portfolio
Chart created by the author using data from Google Finance
My positions in PEP and CSCO are not quite full-size positions, which, somewhat arbitrarily, I define as about 1% of total portfolio value. I can add about 22 shares of PEP and 104 shares of CSCO to make them full-size positions. I’m not looking to add to MMM, TRV, IBM, or JPM, since those already are full-size positions.
As for the other candidates, only DTE looks interesting to me. BEN, AMTD, and USB are all Financials sector stocks and my exposure to that sector is already large enough. On the other hand, my Utilities sector exposure is rather small at only about 3% of the market value of my portfolio, so a quality utility stock trading below fair value certainly piques my interest.
DTE’s current yield of 3.62% is quite attractive and about 11% above the stock’s 5-year average dividend yield:
Source: Portfolio Insight (dated 18 September 2020)
Furthermore, the company has increased its dividend consistently, favoring increases topping 7% in each of the last 4 years.
Source: Portfolio Insight (dated 18 September 2020)
It appears that DTE provides a good opportunity to increase my Utilities sector exposure, but I still need to do a deeper due diligence pass before committing to opening a position.
By the way, I’ve written about BEN previously as it continues to show up on my screens. Every time I consider the stock to see if an investment is warranted, I’m not impressed by its prospects. The company’s assets under management have declined every year since 2014 and its stock price is down more than 50% from its 2014 trading range. While the company’s recent acquisition of Legg Mason substantially increases assets under management, it remains unclear if the underlying problem of net asset outflows would be solved. Meanwhile, BEN’s quality score has dropped from 23 to 21 after Simply Safe Dividends downgraded BEN’s Dividend Safety Score and Value Line lowered the stock’s Safety Rank.
In this article, I ranked dividend growth stocks in the Dividend Radar list whose current dividend yield is above the 5-year average dividend yield by at least 5%. Additionally, I limited my search to stocks with dividend increase streaks of at least 10 years, and I screened for stocks with yields of at least 3% and with 5-year dividend growth rates of at least 7%.
The top 10 stocks are high-quality dividend growth stocks with upside potential based on their current valuations and favorable (or near-favorable) CDNs. Some of these stocks have performed poorly in recent years, so readers should investigate and understand the reasons for that poor performance before investing.
I personally own six of this month’s top 10 and may consider rounding out my PEP and CSCO holdings to full positions. DTE looks interesting and appears to provide an opportunity to increase my Utilities sector exposure, but I need to spend more time researching the stock before committing funds.
Thanks for reading and take care, everybody!
Disclosure: I am/we are long PEP, CSCO, MMM, TRV, JPM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.