3 Stocks Offering 3%+ Yield, 8%+ Average Dividend Growth And A Potential For 8%+ Upside

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Includes: ABBV, VTR, WSM
by: The Dividend Bro

Summary

Stocks offering above-average yield, dividend growth and upside potential can offer investors a margin of safety in case the stock market enters a volatile period.

Ventas, AbbVie and Williams-Sonoma all have yields above 3% and average dividend growth over the past 5 years above 8%.

All three companies are also at least 8% undervalued by how I value stocks. .

For the purposes of this article, I wanted to highlight stocks that are offering yields above 3%, 8%+ average dividend growth over the past 5 years that also have the potential to return 8% or more based on how I value stocks. Why these requirements? A higher yield and larger margin of safety can offer protection in case the market becomes volatile.

Here are my investment guidelines for my wife's and my portfolio.

Core holdings are those that:

  • Have at least 10 consecutive years of dividend growth.
  • Are considered by S&P Capital/Morningstar to be no more than 5% overvalued.
  • Are considered by F.A.S.T. Graphs to have a current price to earnings ratio that is no more than 5% overvalued when compared to the five-year average price to earnings ratio.
  • Have a dividend yield above 2.0%.
  • Dominate their sector of the economy.

Supporting holdings are those that:

  • Have 5 years of dividend growth or 10 years of paying uninterrupted dividends.
  • Are considered by S&P Capital/Morningstar to be at least fair valued.
  • Are considered by F.A.S.T. Graphs to have a current price to earnings ratio no more than 5% overvalued when compared to the five-year average price to earnings ratio.
  • Have a dividend yield above 1.0%.

Speculative holdings are those that:

  • Have recently initiated a dividend.
  • Or have an average dividend growth rate of at least 10% or higher for the life of the dividend.
  • Are considered by S&P Capital/Morningstar/F.A.S.T. Graphs to be at least 5% undervalued.

Ventas (NYSE:VTR)

Current Yield

# Years div growth

5 Year Div Growth Rate

4.27%

6

8.80%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$87

N/A

$64

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5 Year Avg PE

Price Target

15.9

16.6

Under $84

Click to enlarge

According to google.com/finance, Ventas is a real estate investment trust that specializes in healthcare facilities. It operates senior living houses, medical office buildings and triple-net leased facilities. Triple-net leased means that the tenant agrees to pay for the maintenance of the property, building insurance and real estate taxes. Ventas offers a current yield of 4.27%, has raised dividends for 6 consecutive years and has an average raise of 8.8% over the last 5 years. Very few stocks that I follow have this sort of starting yield in addition to high-single-digit dividend growth.

FAST Graphs says the current price to funds from operations is 15.9, while the 5-year average is 16.6. This tells me that Ventas is 4.4% undervalued. S&P Capital gives a 12-month price target of $87, which would offer investors more than 27% of upside based on the 10/21/2016 closing price of $68.37. S&P Capital doesn't list a fair value for Ventas, so I won't be able to include that number. Morningstar says fair value is $64 or 6.39% lower than Friday's close. Average these numbers out and I find the stock to be 8.42% undervalued. With more than 5 years of dividend growth, I would be willing to pay 5% over fair value for Ventas. Any price under $84 would qualify for purchase.

In the interest in transparency, Ventas is one of our top 10 largest holdings, so I am not looking to add to the position as of now. If I didn't hold a position, I would strongly consider a purchase at these levels.

AbbVie (NYSE:ABBV)

Current Yield

# Years div growth

4 Year Div Growth Rate

3.74%

44

10.62%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$84

$105.80

$73

F.A.S.T Graphs Current PE

F.A.S.T Graphs 4 Year Avg PE

Price Target

13.1

15.1

Under $99

Click to enlarge

AbbVie, which counts the blockbuster rheumatoid arthritis drug Humira among its drug offerings, was created when Abbott Laboratories (NYSE:ABT) spun the company off as a standalone entity in 2013. The pre-spin Abbott had raised dividends for more than 4 decades -- a pretty impressive dividend growth streak. As a standalone company, AbbVie has raised dividends an average of more than 10% each year since the spin-off. Not a bad way to start their own dividend growth history. Shares have a current yield of 3.74%.

F.A.S.T Graphs says that the current PE ratio is 13.1. This is 15.27% lower than the 4-year average ratio of 15.1. S&P Capital has a 12-month price target of $84 and fair value of $105.80. Based on Friday's closing price of $60.98, this would represent potential gains of 37.75% and 73.50%, respectively. Morningstar is more conservative with their fair value of $73. Still that could result in a price appreciation of almost 20%. The average of these numbers tell me that AbbVie is currently 36.56% undervalued. This is the second best upside potential of any company that I follow. Including Abbott Lab's dividend growth history, I would be willing to pay a 5% premium to fair value for shares of AbbVie. Any price under $99 would qualify for purchase.

If you chose not to include Abbott's dividend history, the company has raised dividends less than 5 years. Therefore, I would require the stock to be at least 5% undervalued or under $86.

As with Ventas, AbbVie is one of our largest positions so I am not eager to add right now. Might be an opportunity for a new investor though.

Williams-Sonoma Inc (NYSE:WSM)

Current Yield

# Years div growth

5 Year Div Growth Rate

3.15%

11

20.20%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$57

$50.80

$73

F.A.S.T Graphs Current PE

F.A.S.T Graphs 5 Year Avg PE

Price Target

13.9

17.4

Under $71

Click to enlarge

Williams-Sonoma is a specialty retailer of home goods. Their offerings include Pottery Barn, Pottery Barn Kids, Williams-Sonoma Home and Rejuvenation. According to Morningstar, the company opened its first store in Australia in 2013 and Mexico in 2015. Expanding internationally may offer the company additional revenue streams. More than half of revenue is from direct ordering, meaning that the company isn't as reliant on actual physical locations as some other retail companies. Williams-Sonoma currently sports a yield of 3.15% and has raised dividends every year for the last decade. The average raise over the last 5 years has been a robust 20.20%.

F.A.S.T Graphs gives a current PE ratio of 13.9 and a 5 year average PE of 17.4. According to this metric, shares are 25.18% undervalued. S&P Capital says the 12-month price target is $57, or more than 21% undervalued based on Friday's closing price of $46.99. Their fair value is $50.80, which would be good for an 8.11% gain from the current price. Morningstar's fair value is $73. That's more than 55% of potential upside. The average of these numbers says that the stock is undervalued to the tune of more than 27%, making William Sonoma one of the most undervalued stocks I follow. The stock is down almost 20% since the start of the year. Perhaps this pullback is a good opportunity for investors. With a decade of dividend growth behind it, I would be willing to pay a 5% premium to fair value. Any price under $71 and the company would qualify for purchase.

We don't currently own shares of William Sonoma, but it is near the top of our watch list.

Conclusion

If you are looking for some higher yielding companies with impressive dividend growth as well as upside potential, you might want to take a look at Ventas, AbbVie and William Sonoma. Each company yields higher than 3% and has shown a dedication to rewarding shareholders with rich annual dividend increases. All of these companies have upside potential of more than 8% based on how I value stocks. Good starting yield plus a lengthy history of dividend raises plus upside potential could offer investors a good opportunity at current prices. What do you think of these stocks? What is on your watch list?

Disclosure: I am/we are long ABBV, VTR.

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.

Additional disclosure: We are not investment professionals. Please do your own research prior to making an investment decision.