Myron J. Gordon wrote the classic paper “Dividends, Earnings, and Stock Prices," in May 1959. In this paper he showed that a dividend growth stock has 2 components of return, yield and dividend growth. I have simplified this finding into a quick screen for dividend stocks. I use the metric fair P/E= %yield + %(5-year average annual dividend growth rate). Details can be found in my Instablog.
I use a minimum 4% yield for initial purchase of dividend growth stocks. I would like the 5-year dividend growth rate to be on the order of 10% per year. It should be noted that high dividend growth rates are unsustainable in perpetuity, thus a stock must have good earnings growth and a strong balance sheet to meet my criteria. I use David Fish's CCC charts to determine longevity of dividend growth rate.
In screening the market, three stocks on my watch list appear to be good values now:
Abbot Labs (NYSE:ABT) has a current yield of 3.7%, but dropped to $46.89 on August 10, 2011. The 4% yield point is $48 with the current dividend of $1.92. The 5-year dividend growth rate is 9.7%. Therefore, a fair p/e would be 13.6. The present ttm p/e is 11.7 (First Call).
Intel (NASDAQ:INTC) has a current yield of 4.1%. The dividend is $.84. The 5-year dividend growth rate is 14.5%. Therefore the fair p/e would be 18.5. The present ttm p/e is 9.1 (First Call).
Lockheed Martin (NYSE:LMT) has a current yield of 4.1%. The dividend is $3.00. The 5-year dividend growth rate is 20.2%. Therefore fair p/e would be 24.3. The present ttm p/e is 9.8 (First Call).