20 Strong Dividend Growth Stocks - Rock Solid Ranking Free Report

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Includes: GNTX, TD
by: The Dividend Guy

Last year, I created the Rock Solid Ranking, a dynamic stock ranking list that shows a value for each dividend stock I follow. I've worked on calculations that consider several metrics in order to find the best companies among all those on the stock market. This list is particularly useful when the stock market is becoming highly valued (not overvalued yet in my opinion).

Each month, I'll be sharing with you, for free, the top 10 dividend growth stocks for both the US and Canadian markets. You can download your report here:

January 2016 Top 20 Rock Solid Ranking

Why Update this list on a monthly basis?

The idea of providing you with an updated top 10 list monthly is to show how metrics and rankings can change from month to month. This becomes highly important during the earnings' season as lots of new data come out at the same time and it's hard to digest everything. The updated Rock Solid Ranking gives you a quick view in a few minutes of which companies are best or worst. This printer friendly report stands on a single page with lots of metrics to help you quickly analyze if the company deserves more attention for your next pick.

Out of this top 10 for each stock market, I review 2 companies each month; one US and one Canadian. We start this month with Gentex (NASDAQ:GNTX).

Gentex (GNTX)

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Source: YCharts

Gentex operates in a very narrow niche where it has 90% of the market share and owns over 1,000 patents protecting its technology. The company designs and manufactures automatic-dimming rear view mirrors and electronics for the automotive industry, dimmable aircraft windows for the aviation industry, and commercial smoke alarms and signaling devices for the fire protection industry

The recent boom in the automobile industry is pushing Gentex towards a greater future. In 2014, only 25% of cars were using auto-dimming mirrors and management believes this percentage could go up to 45% within the next 10-12 years. The fact that the company controls 90% of the market combined with its patent portfolio make it the leader of the industry and it should continue to increase sales as the market grows naturally. There is definitely lots of potential to be realized here.

Gentex is well aware it evolves in a very specific niche that could change quickly. This is why the company is also developing dimming windows for aircraft, bought Homelink from Johnson Controls in 2013 for $700M and also created Smartbeams, a different type of car headlight that enables automatic switching between bright and regular lighting.

Unfortunately, not everything is perfect around Gentex. It is still a relatively small company in the car industry and bigger competitors could decide to hit their 90% market share in the auto-dimming mirrors. For example, Magna International (NYSE:MGA) shows a market capitalization 3.63 times bigger than GNTX. If Magna was to enter into Gentex' market, it would definitely hurt their business model.

TD Bank (NYSE:TD) (TD.TO)

Click to enlarge

Source:YCharts

On top of being a leader in Canada, TD is also the most productive Canadian Bank (e.g., more earnings relative to its risk-weighted assets). Its earnings volatility is lower than its peers due to less exposure to capital markets. Finally, TD has deployed a very lean structure into its branches which benefit greatly from their expansion in Quebec and the US. TD Bank is now known as "America's Most Convenient Bank." TD has recently beat analysts' estimates once again. Their lean structure gives them one of the best customer service scores across Canada.

TD has the biggest presence in the US among the Canadian banks. This should help their 2016 results since the economy is rolling for their southern neighbors. The currency exchange rate should also have a positive impact on their business model.

The fact that TD operates a more classic banking model (savings and loans) reassures investors through stable revenues and profits. It is easier then to predict their cash flow and dividend increases. Its dividend yield is near 4% as the stock has become another victim of the bearish market in Canada.

The biggest risk for TD is probably to run through a bad year in 2016 due to higher loan defaults. The Canadian economy is not at its best due to very low oil prices. If we would experience a burst in the housing bubble in major markets such as Toronto, Calgary and Vancouver, TD would not be able to avoid the downfall.

How the Rock Solid Ranking is built

I personally use this list to manage my own portfolio along with portfolios I manage at Dividend Stocks Rock. This is not an ordinary ranking where we arbitrarily apply a score to dividend stocks. We actually build a dividend growth model where multiple factors are accounted for in the score calculation. We started by listing the most important metrics we follow before buying a stock. Here's the list:

1-year Revenue Growth

5-year Revenue Growth

1-year Earnings per Share (Diluted) Growth

5-year Earnings per Share (Diluted) Growth

1-year Dividend Growth

5-year Dividend Growth

Dividend Payout Ratio

P/E ratio PEG

Dividend Yield

Debt to Equity ratio

Price to Book Value

Explanation of metrics used

For you to understand why I have decided to use the above-mentioned metrics instead of others, I'm providing you with this complete explanation of how I came up with this ranking.

If a company can't keep up its high ranking, it means its losing pace with one or more important metrics in our model. The more it loses ranking, the closer it is to joining the sell list. On the other hand, a company that improves its scores quarter after quarter definitely earns the buy mention as it shows it's headed in the right direction. The Rock Solid Ranking goal is to provide you with an instant valuation of a stock according to our dividend growth investing model.

I'm not going to disclose our calculation methods here but I'll tell you which metrics we follow. This can help you build your own investing model. Total score of a company could technically reach 100% if it was perfect on all attributes. The score can also be negative as we give penalties for negative growth numbers.

#1 SALES

In my opinion, if you don't sell, you can't make money. If you can't make money, you can't pay dividends. If you can't increase your sales, you can't increase your profits and you can't increase your dividend. This is why revenue growth is so important. The best way to measure if a company is making more money is by looking at its revenue growth.

A company can run through a tough year or show erratic revenue movements. This is why we take a look at both 1-yr and 5-yr revenue growth. The first metrics to be used in our model are:

1-year Revenue Growth

5-year Revenue Growth

More weight is given to the 5-yr and penalties (negative score) are attributed to companies that show negative revenue growth. You can't hope to increase your dividend consistently if your revenues decrease.

#2 PROFITS

Showing strong revenues is important, but it doesn't guarantee you will get strong dividend payouts. Profits drive amounts to be paid through dividends. If you look at a company like Amazon (NASDAQ:AMZN); revenues are huge but profit is thin. Therefore, they can't hope to pay a dividend at this point in time (especially when your P/E is 574!).

In order to make sure we don't give a high score to a company that recently restructured its costs or sold an important asset to boost its profits, we also consider 1-yr and 5-yr Earnings Per Share (EPS) growth.

1-year Earnings per Share (Diluted) Growth

5-year Earnings per Share (Diluted) Growth

Earnings and revenue growth combined together weigh a lot in our model. Both metrics combined together is the key for a sustainable business model. This is why so much weight (40%) is attributed to these 4 metrics.

#3 DIVIDEND METRICS

Once we have found companies with sales and profits, it's time to take a look at what we desire most: dividend growth potential! In order to find out if a stock is not only a good stock but a good dividend stock, we use 3+1 different metrics. The "+1" is because we look at both 1-yr and 5-yr dividend growth percentages:

1-year Dividend Growth

5-year Dividend Growth

Dividend Payout Ratio

Dividend Yield

The 1-year dividend growth shows the company's willingness (or capacity) to increase its dividend over a short period of time. The 5-year dividend growth confirms this willingness/capacity to keep increasing payments to shareholders.

Then, the dividend payout ratio is also very important to us. We penalize companies paying over 120% of their earnings. We didn't select 100% as we must always take into consideration that the payout is in $ and profit is an accounting term (including amortization for example). This is why it's important to give some room for high dividend payout ratio companies. We also give a smaller weight to companies with very low payout ratio (0%-20%). This shows that the company would rather keep its money in their bank account instead of sharing the wealth with stockholders.

Finally, the dividend yield is also a debated topic. Some investors are looking at 5%+ dividend yield (I keep receiving tons of email telling me I look for low yield dividend stocks). Many investors (like me!) prefer sound businesses with dividend stocks around 3%. In the past four years, I've noticed that stocks paying over 4% often show shakier metrics than stocks with a lower yield. Dividend metrics combined together represent 40% of our ranking calculation.

#4 DEBT LEVEL

Another important consideration is the debt level of a company. The idea behind the choice of this is simple; debt payment requires cash flow, cash flow that could be used to pay dividends. You don't want a company strangled by their debt and forced to make unfortunate decisions. This is why we use a debt ratio in our model:

Debt to Equity ratio

Here again, a high debt to equity ratio is penalized by negative points.

#5 STOCK VALUATION

Finally, the price you pay for a stock is also important. I'm the first one to pay a relatively high price for a great company. Still, if I can find a company that is relatively similar but traded at a cheaper price than another, I will definitely take a look at it.

We have used the following metrics in our system to give points to each stock:

P/E ratio PEG

Price to Book Value

You can see how we performed since we created our dividend growth portfolios here