There is no doubt about it...the correction is here! All major U.S. stock indices are now down 12%-15% from their respective peaks and we believe there are pockets of value everywhere and investors should definitely start putting money work.
Our investment plan is simple: Buy great stocks at good prices! And the current sell-off has already presented some fantastic opportunities in some great high-quality dividend stocks.
As a quick overview, we use a combination of fundamental and technical analysis to determine which stocks to buy and when to buy them. For dividend stocks in particular, we have a proprietary rating system that ranks over 500 U.S. dividend stocks on a weekly basis. Our ratings are derived by ranking each stock based on 30 key fundamental and technical data points across four rating categories: (1) Dividend, (2) Safety, (3) Value, and (4) Momentum. This rating system helps us quickly screen for great stocks (i.e., stocks with high Dividend, Safety and Value ratings).
In addition, we scan the charts of our top-rated stocks daily looking for strong levels of support and resistance, which ultimately helps us determine a target "Buy Zone" for each stock. We believe that patiently waiting for a low-risk entry point for a given stock will drastically improve your long-term investment results. We focus on four key levels of support when determining a "Buy Zone": (1) Key Technical Support, (2) Stock-Specific Volatility, (3) Valuation, and (4) Yield.
Investors can measure value in a number of ways. One obvious way is to use traditional valuation metrics like Price/Sales, Price/Earnings, Price/Book, or EV/EBITDA. Our "Value" looks at these metrics and ranks stocks based on where they are currently trading compared to 5-year average multiples (the higher the Value rating...the higher the perceived value).
Another value metric that dividend investors should also look at is to compare a stock's current yield with its 5-year average yield. Investors that focus on generating income place a significant amount of value on that income stream and will likely jump at the opportunity to buy a great stock with a higher than average dividend yield.
That said, we recently scanned our entire dividend stock universe and came up with our current "All-Value" Team. This team is made up of 35 dividend stocks that currently have a dividend yield higher than their respective 5-year average yield (that also meet the parameters below):
- Dividend Yield >= 2.5%
- Yields with Consecutive Increases >= 10 years
- 5yr Dividend CAGR >= 3.0%
- Value Rating >= 50
- Safety Rating >= 15
- Momentum Rating >= 15
Note: Often times we utilize our Safety and Momentum Ratings to rule out "Value Traps". We believe that stocks with Safety and Momentum Ratings in the bottom 15% of all the stocks in our universe should generally be avoided.
We will highlight each of these stocks over the course of a 7-part series. Below is a schedule of the entire series. Please make sure to "follow" us so that you will be notified when each new article is published.
- Part 1: Honorable Mention (stocks #31-35)
- Part 2: Sixth Team (stocks #26-30)
- Part 3: Fifth Team (stocks #21-25)
- Part 4: Fourth Team (stocks #16-20)
- Part 5: Third Team (stocks #11-15)
- Part 6: Second Team (stocks #6-10)
- Part 7: First Team (stocks #1-5)
The All-Value Team: Honorable Mention
On average, our 35 All-Value Team stocks currently have yields that are 35% higher than their respective average 5-year yield. This article highlights the 5 stocks that made Honorable Mention (stocks ranked #31-35). The tables below summarize some of the key data points that we analyze when ranking our dividend stocks.
#35 Genuine Parts (NYSE:GPC)
Founded in 1928, Genuine Parts company distributes automotive replacement parts, industrial replacement parts, office products, and electrical/electronic materials. The company operates 60 NAPA automotive parts distribution centers and 1,100 NAPA AUTO PARTS stores. The company has increased its dividend for 59 consecutive years and provides shareholders with a 3.1% dividend yield (which represents a 5.3% premium to its 5-year average yield of 2.9%). GPC also has a payout ratio of less than 50%.
As shown in the table above, GPC has a Value Rating of 64 and currently trades at a discount to several of its long-term average valuation multiples (P/Sales, P/Earnings, and EV/EBITDA).
#34 Sonoco Products (NYSE:SON)
Founded in 1899, Sonoco Products company manufactures and sells industrial and consumer packaging products in North and South America, Europe, Australia, and Asia. The company operates through four segments: Consumer Packaging, Paper and Industrial Converted Products, Display and Packaging, and Protective Solutions. SON provides investors with a 3.7% dividend yield, which represents a 9.0% premium to its 5-year average yield of 3.4%. SON has increased its dividend for 32 consecutive years and has a relatively modest payout of 54%.
As shown in the table above, SON has a Value Rating of 67 and currently trades at a discount to several of its long-term average valuation multiples (P/Sales, P/Earnings, and EV/EBITDA).
#33 Aflac Inc. (NYSE:AFL)
Founded in 1955, Aflac Incorporated provides supplemental health and life insurance products. The company has increased its dividend for 32 consecutive years and generates a dividend yield of 2.8% (which represents a 9.6% premium to its 5-year average yield of 2.6%). The company has a modest payout ratio of 22% - despite having increased its dividend at a CAGR of 14.7% over the last 10 years.
As shown in the table above, AFL has a Value Rating of 66 and currently trades at a discount to several of its long-term average valuation multiples (P/Earnings, P/Book, and EV/EBITDA).
#32 Southern company (NYSE:SO)
Founded in 1945, The Southern company operates as a public electric utility company. It is involved in the generation, transmission, and distribution of electricity through coal, nuclear, oil and gas, and hydro resources in the states of Alabama, Georgia, Florida, and Mississippi. The company also constructs, acquires, owns, and manages generation assets, including renewable energy projects. SO provides investors with a 5.1% dividend yield, which represents a 11.0% premium to its 5-year average yield of 4.6%. SO has increased its dividend for 14 consecutive years, with a 10-year dividend CAGR of 3.9%.
As shown in the table above, SO has a Value Rating of 59 and currently trades at a discount to several of its long-term average valuation multiples (P/Sales, P/Earnings, and P/Book).
#31 ACE Limited (NYSE:ACE)
Founded in 1985, Ace provides a range of property and casualty insurance and reinsurance products. The company has increased its dividend for 22 consecutive years and generates a dividend yield of 2.7% (which represents a 12.6% premium to its 5-year average yield of 2.4%). The company has a modest payout ratio of 30% - despite having increased its dividend at a CAGR of 12.1% over the last 10 years.
As shown in the table above, AFL has a Value Rating of 54 and currently trades in line with several of its long-term average valuation multiples (P/Earnings, P/Book, and EV/EBITDA).
If you are looking to generate safe and stable income in a volatile market environment, the All-Value Team is a great place to start your diligence. We believe that any of these 35 "Value" stocks would make a nice addition to a long-term dividend growth portfolio.
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Disclosure: I am/we are long GPC, SO.
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.