4 Dividend Growth Stocks Worth Looking At Right Here

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Includes: D, SBUX, VFC, VZ
by: The Dividend Bro

Summary

With at least 20 years until retirement, I'm looking for companies that execute their business model and offer investors dividend growth.

V.F. Corp, Verizon, Starbucks and Dominion Resources are such companies.

All have some short-term headwinds, but I feel these companies will be paying and raising dividends for years to come.

Due to timing of contributions this month, my wife and I should have enough fresh capital in our IRAs to make two purchases. Last month, we started new positions in Nike (NYSE:NKE) and Lockheed Martin (NYSE:LMT). We added Visa (NYSE:V) earlier this month, after it released earnings, to bring this position to a half position. We bought shares at $86.39. I've long wanted to add shares of the world's largest credit card company and didn't mind paying up for a quality name. While I'd like our second purchase of the month to be a current holding, I wouldn't rule out adding a new name to our portfolio. Without further ado, here is my shopping list:

V.F. Corporation (NYSE:VFC)

Current Yield

# Years Div. Growth

5-Year Div. Growth Rate

3.31%

44

18.61%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$58

$51.80

$73

F.A.S.T Graphs Current P/E

F.A.S.T Graphs 5-Year Avg. P/E

Price Target

16

18.9

Under $69

The maker of North Face apparel and Wrangler jeans has been in the doldrums for quite some time. Shares are down almost 5% since the start of the year and down 18% from the beginning of 2016. Investors seem to be avoiding athleisure companies, and Amazon (NASDAQ:AMZN) seems to be weighing on any company that has a brick-and-mortar presence. To me, these are somewhat short-term issues. Sure, Amazon has been a game changer for how people shop, but V.F. Corp. has raised dividends for the past 44 years. During that time, the company has faced issues before and overcome them. My guess is that it will be able to weather this storm and keep rewarding shareholders for their patience. Shares of V.F. Corp currently yield 3.35%. That is a pretty nice yield considering the average dividend raise over the past 5 years has been north of 18%.

F.A.S.T. Graphs gives a current price-to-earnings ratio of 16 and an average P/E over the past 5 years of 18.9. This tells me the shares are 18% undervalued. S&P Capital assigns a 1-year price target of $58. Based on the 2/14/2017 opening price of $50.09, shares are almost 16% undervalued. It lists fair value as $51.80, which is 3.41% above the current trading price. Morningstar is by far the most bullish, with a fair value of $73. This would be good for a 45.74% gain from today's prices. It also assigns a 5-star rating, which is only given to the most undervalued stocks. Average these numbers out and I find the shares are almost 21% undervalued. VFC is one of the most undervalued stocks that I follow. With more than 4 decades of raising dividends, I consider V.F. Corp. to be a core holding and would be willing to pay 5% above my fair value. Therefore, I would consider buying shares up to $69. Obviously, I would much rather have shares at a lower price, but this shows you how much upside I feel the company has. This is currently one of our smallest holdings, so I am eager to add to it. V.F. Corp. reports 4th quarter earnings on Friday, so we will get a glimpse into the company's financial performance.

Verizon (NYSE:VZ)

Current Yield

# Years Div. Growth

5-Year Div. Growth Rate

4.78%

12

3%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$54

$46.90

$50

F.A.S.T Graphs Current P/E

F.A.S.T Graphs 5-Year Avg. P/E

Price Target

12.5

15.9

Under $60

Verizon shares are down almost 4% since the company released earnings on 1/25/2017. It missed on earnings per share by 3 cents, and while the company beat on expected revenue, that figure was still down 5.6% year over year. Of course, the market often thinks short term and reacts accordingly, hence why shares are down since the report. As someone who is thinking 20+ years out, this short-term price drop offers me a chance to scoop up shares of this high-yielding company at a lower price. People aren't giving up their smartphones anytime soon, and though competition in this sector is fierce, Verizon is an industry leader. VZ is currently a half position for us, so I would welcome an opportunity to add to our position.

F.A.S.T. Graphs says current the current P/E multiple is 12.5. Compared to the average P/E over the past 5 years of 15.9, this measure says shares are massively undervalued to the tune of 27.20%. There is no guarantee that shares will trade at this multiple again, but on a price-to-earnings basis, Verizon has a lot of upside. S&P Capital says the 12-month price target is $54. Based on Tuesday's opening price of $48.31, shares are almost 12% undervalued by this measure. S&P Capital's fair value is $46.90, which would make shares about 3% overvalued. Morningstar says the fair value for shares is $50, which means the stock is 3.5% undervalued. Average these numbers out and I find shares to be almost 10% undervalued. With 12 years of dividend growth, I would be willing to overpay by 5% our fair value. Under $60 and my investing rules would allow for a purchase of Verizon shares.

Starbucks (NASDAQ:SBUX)

Current Yield

# Years Div. Growth

5-Year Div Growth Rate

1.79%

7

24.90%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$60

$53.40

$66

F.A.S.T Graphs Current P/E

F.A.S.T Graphs 5-Year Avg. P/E

Price Target

28.2

30

Under $65

Shares of the coffee giant are down almost 4% since the company reported 1st quarter earnings at the end of January. Why the drop? Starbucks's same-store sales were "only" 3% year over year in the Americas. In the previous quarter, this growth was 5%. Management listed the waiting times for mobile orders during heavy traffic times as a reason for the quarter-over-quarter decline. People would walk in hoping to mobile-order to avoid the long lines and would see that there was still a long wait time for their beverage. These folks would then leave without making a purchase. Management stated it would work to address this issue. In the short term, heavy traffic leading to lost opportunities is a headwind for Starbucks. Long term, having too many costumers isn't the worst issue a business can have. Starbucks also continues to open stores in China and sees that market as a long-term growth situation. A company that has many loyal customers and is expanding is one I want to partner with. People always complain that the company is a low-yielding one, but its average dividend raise over the past 5 years is 24.90%. Starbucks's most recent raise was 25%. I'll take that level of growth.

The current price-to-earnings multiple is 28.2, according to F.A.S.T Graphs. With a 5-year average PE of 30, shares are currently 6.38% undervalued. S&P Capital says shares could be as high as $60 a year from now. Based on Tuesday's opening price of $56.02, the stock is 7% undervalued. S&P Capital's fair value of $53.40 says shares are currently 4.68% undervalued. Morningstar lists a fair value of $66. It is very bullish on the company, as this means shares are almost 18% undervalued. Take the average of these numbers and I find shares of Starbucks to be 6.66% undervalued. With 7 years of dividend growth, I would be willing to buy shares at any price below $65. A company that dominates its sector of the economy, shows solid growth and rewards shareholders with juicy dividend growth the way Starbucks does is one I want to hold in our portfolio. Like V.F. Corp., I listed Starbucks as a position I would very much like to add to in an article that was published earlier this year.

Dominion Resources (NYSE:D)

Current Yield

# Years Div. Growth

5-Year Div Growth Rate

3.80%

14

7.30%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

$75

$64.20

$76

F.A.S.T Graphs Current P/E

F.A.S.T Graphs 5-Year Avg. P/E

Price Target

19.5

19.3

$76

Dominion Resources is the only name on this list that we don't currently own. We don't have a utility company in our portfolio, and I would like to add one sometime this year. When discussing utility companies, I usually focus on Southern Company (NYSE:SO), but Dominion caught my eye when I was reading through its 2/1/2017 earnings report. While the company stated that earnings for 2017 will be below 2016's, it projected earnings to increase by at least 10% in 2018 over this figure. It is also forecasting that earnings will grow 6-8% off of 2017's numbers through 2020. The company stated its intent to grow the dividend 8% year over year. Dominion's 5-year dividend growth rate is 7.3% and the most recent raise was 7.86%, so its forecasted dividend growth isn't something that looks unattainable, especially if the company is able to execute like it says.

F.A.S.T Graphs says the current P/E ratio of 19.5 is about 1% above the 5-year average of 19.3. S&P Capital says its 1-year price target is $75, or almost 2% above Tuesday's opening price of $73.59. It lists fair value at $64.20. This would make shares almost 13% overvalued. Morningstar says fair value is $76, or 3.27% above recent prices. Average these numbers out and I see shares as a little more than 2% overvalued. With 14 years of dividend growth, I am willing to overpay by 5% for what I think fair value of a stock is. Under $76 and I'd feel comfortable adding Dominion Resources to our portfolio.

Conclusion

This month's shopping list of stocks all appear to have short-term issues. Since my wife and I are long-term investors, this short-term static doesn't mean much to us. If a company is dominant in its sector of the economy and good at executing on its business model, it is going to make money in the long run. That money can be used to raise dividends, which increases our income stream. I will let others worry about short-term issues at companies. I'm in it for the long haul. What do you think of our shopping list? Which would you buy from this list? What companies would you add to this list?

Disclosure: I am/we are long VZ, SBUX, VFC, V, LMT, NKE.

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 investing professionals. Please do your own research prior to making an investing decision. We may initiate a long position in Dominion Resources in the next 72 hours.

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