David Fish maintains a list of stocks with at least five consecutive years of dividend increases. Colloquially called the CCC list, it contains more than 750 dividend growth stocks trading on U.S. exchanges. While the CCC list and the accompanying spreadsheet is a wonderful source for dividend growth investors, analyzing more than 750 stocks is near impossible.
My monthly 10 Dividend Growth Stocks series attempts to identify 10 stocks worthy of further research. To create the list, I trim the CCC list to a manageable number of stocks, rank the trimmed list, and assign a 7-star rating to each stock. In my view, stocks rated 5 stars or better are worthy of further analysis.
Trimming the CCC List
The CCC stocks are divided into 3 categories based on the number of consecutive years of dividend increases: Champions are stocks with a streak of 25 or more years, Contenders are stocks with 10-24 consecutive years of dividend increases, and Challengers are stocks with a streak of 5-9 years. The latest list (dated 12/30/16) contains 768 stocks, with 108 Champions, 227 Contenders, and 433 Challengers.
Usually, I apply a series of screens to trim the CCC list. This time, however, I decided to use the Top Holdings of Dividend ETFs. Of the 45 top holdings ranked by weight, only four stocks are not in the CCC list:
- General Electric Company (GE) - ranked #20
- Intel Corporation (INTC) - ranked #23
- Entergy Corporation (ETR) - ranked #34
- Joy Global Inc (JOY) - ranked #41
GE, INTC, and ETR froze their dividends in recent history and have been removed from the list, while JOY has never qualified for CCC membership.
Of the 41 remaining stocks, 15 are Champions, 15 are Contenders, and 11 are Challengers.
The Ranking Process
I ranked the 41 stocks using data from the CCC spreadsheet and additional sources like Morningstar, S&P Capital IQ, Finbox.io and F.A.S.T. Graphs. My ranking system favors established dividend paying stocks with strong fundamentals and stocks potentially trading at or below fair value. Dividend safety is another important factor.
Stocks I own in my DivGro portfolio are highlighted.
Three stocks from last month's top 10 appear in this month's top 10. These stocks are identified with a subscript that represents last month's ranking. For example, QCOM4 means QCOM was ranked fourth last month.
Ratings and Sectors
The following table presents the top 10 ranked stocks by sector, along with star ratings for each stock. Two stocks earned 7-star ratings while the others are all rated 6 stars. I consider stocks with 5-star ratings or better worthy of further research:
|1||Qualcomm Inc (QCOM)||(*******)||Information Technology|
|2||Target Corporation (TGT)||(*******)||Consumer Discretionary|
|3||Cisco Systems, Inc (CSCO)||(******-)||Information Technology|
|4||Johnson & Johnson (JNJ)||(******-)||Health Care|
|5||3M Company (MMM)||(******-)||Industrials|
|6||Texas Instruments Inc (TXN)||(******-)||Information Technology|
|7||Lowe's Companies, Inc (LOW)||(******-)||Consumer Discretionary|
|8||Wal-Mart Stores, Inc (WMT)||(******-)||Consumer Staples|
|9||International Business Machines (IBM)||(******-)||Information Technology|
|10||Lockheed Martin (LMT)||(******-)||Industrials|
Interestingly, the Information Technology sector dominates with four stocks, while the Consumer Discretionary and Industrials sectors follow with two stocks each.
Key Statistics and Fair Value Estimates
The table below presents some key statistics as well as fair value estimates for the top 10 stocks. Unless otherwise indicated, data are from the CCC spreadsheet.
In the table, Yrs are the years of consecutive dividend increases, Payout is the EPS (earnings per share) payout ratio, and Debt is the debt to equity ratio. The compound dividend growth rate over a 5-year period (5-Yr DGR) is provided, where available. Morningstar's Moat and Standard and Poor's Credit Rating, as well as Value Line's Safety rank and Financial Strength rating, are also provided. Finally, I present my own estimate of Fair Value, along with a calculation of the current discount to fair value (Discount).
To estimate fair value, I use a multi-stage DDM analysis with proprietary adjustments. Generally, I set a required rate of return of 10% and use estimates of the annual EPS growth rate for the next 5 years. Thereafter, I taper the growth rate to a perpetual growth rate of 3% after 10 years. Adjustments to the calculated fair value are based on various factors, including an assessment of dividend safety.
The visualization tools of Simply Wall St provide an interesting overview of the top 10 ranked stocks. Their snowflake infographic gives a visual summary of each stock's fundamentals and investment profile, scored on five axes (value, future, past, health, and dividend). You can read more about the company's analysis model at Github.
Only TGT has a negative return, and that is mainly due to an 8% drop after disappointing fourth-quarter guidance.
Only four of the top 10 ranked stocks are trading at discounts to fair value. In ranking and rating the stocks, I estimated fair values for all 41 candidates. The following table presents the 10 stocks that are trading at a discount of at least 5% to my fair value estimates. The table is sorted by Discount.
|18||AbbVie Inc (ABBV)||(*****--)||Health Care||24.7%|
|2||Target Corporation (NYSE:TGT)||(*******)||Consumer Discretionary||19.6%|
|1||Qualcomm Inc (NASDAQ:QCOM)||(*******)||Information Technology||15.7%|
|29||Pfizer Inc (PFE)||(****---)||Health Care||14.7%|
|3||Cisco Systems, Inc (NASDAQ:CSCO)||(******-)||Information Technology||12.0%|
|20||Apple Inc (AAPL)||(*****--)||Information Technology||7.6%|
|25||AT&T Inc (T)||(*****--)||Telecommunication Services||7.0%|
|24||LyondellBasell Industries NV (LYB)||(*****--)||Materials||7.0%|
|14||The Boeing Company (BA)||(*****--)||Industrials||6.9%|
|7||Lowe's Companies, Inc (NYSE:LOW)||(******-)||Consumer Discretionary||5.1%|
All stocks through AT&T, which is ranked #25, have 5-star ratings.
With the anniversary of resuming my monthly 10 Dividend Growth Stocks series, I thought it would be fun to see how the year-ago selection performed. Here's a chart showing the price performance (excluding dividends) of each stock since 20 January 2016:
The arithmetic average of these returns is 26.8%. In comparison, the Vanguard Dividend Appreciation ETF (VIG) returned 19.6% over the same period (excluding dividends).
Please note that I'm comparing the performance of last year's top 10 ranked stocks to VIG's performance for fun - I'm certainly not implying that a small portfolio of 10 stocks, while carefully selected and ranked, would outperform a well-diversified ETF like VIG.
As a dividend growth investor, I explore different ways to identify candidate dividend growth stocks for further analysis and possible investment. One approach is to screen the CCC stocks based on key fundamentals and various selection criteria. The basis for this month's analysis is a list of stocks I compiled from the top holdings of dividend ETFs.
Of the top 10 ranked stocks, only TXN and LOW are not in my DivGro portfolio. LOW is trading below my fair value estimate, so perhaps it is time to analyze the stock to see if it makes sense to add it to my portfolio.
Please note that the top 10 ranked stocks are candidates for further analysis. I'm not recommending any of these stocks.
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Disclosure: I am/we are long QCOM,TGT,CSCO,JNJ,MMM,WMT,IBM,LMT,ABBV,PFE,AAPL,T,INTC.
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.