David Fish maintains a list of stocks with at least five consecutive years of paying higher dividends. Colloquially called the CCC list, it contains more than 800 dividend growth stocks trading on U.S. exchanges. The CCC list and the accompanying spreadsheet is a wonderful source for dividend growth investors and I've been using it for years.
In my monthly 10 Dividend Growth Stock series, I identify 10 CCC stocks worthy of further research. To create the list, I trim the CCC list using various screens. I rank the trimmed list and assign a 7-star rating to each stock. Stocks rated 5 stars or better are worthy of further analysis.
Trimming The CCC List
The latest CCC list (dated 4/28/17) contains 819 stocks. This month, I applied the following screens to trim the CCC list to a smaller number of candidates:
- Trailing 12-month Price/Sales ≤ 4 (removes 282 stocks)
- Debt to Equity Ratio ≤ 1.5 (removes 136 stocks)
- (2 × Dividend Yield) + (3-year Dividend Growth Rate ÷ 2) ≥ 8 (removes 102 stocks)
- Earnings per Share Payout < 80% (removes 51 stocks)
- Market Capitalization ≥ $500 Million (removes 23 stocks)
- 1 ≤ Dividend Yield ≤ 7 (removes 16 stocks)
These screens trim the CCC list to 209 candidates.
The Ranking Process
First I ranked the 209 candidates using data available in the CCC spreadsheet. This preliminary ranking helped me to further trim the list of candidates. I selected the top 50 candidates and ranked them using data from the CCC spreadsheet and additional sources like Morningstar, S&P Capital IQ, 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.
Here are the top 10 ranked stocks for May 2017:
Stocks I own in my DivGro portfolio are highlighted.
Seven 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, HRL1 means HRL was ranked first last month.
Ratings and Sectors
The following table presents the top 10 ranked stocks by sector, along with my star ratings for each stock. This month, none of the stocks earned a 7-star rating. I consider stocks with a 5-star rating or better worthy of further analysis:
|1||Hormel Foods Corporation (HRL)||✭✭✭✭✭✭✩||Consumer Staples|
|2||CVS Health Corporation (CVS)||✭✭✭✭✭✭✩||Consumer Staples|
|3||Magna International (MGA)||✭✭✭✭✭✭✩||Consumer Discretionary|
|4||3M Company (MMM)||✭✭✭✭✭✭✩||Industrials|
|5||Qualcomm (QCOM)||✭✭✭✭✭✭✩||Information Technology|
|6||Nike (NKE)||✭✭✭✭✭✭✩||Consumer Discretionary|
|7||Franklin Resources (BEN)||✭✭✭✭✭✭✩||Financials|
|8||Arthur Daniels Midland (ADM)||✭✭✭✭✭✭✩||Consumer Staples|
|9||General Dynamics (GD)||✭✭✭✭✭✭✩||Industrials|
|10||Cardinal Health (CAH)||✭✭✭✭✭✭✩||Health Care|
Key Statistics and Fair Value Estimates
The table below presents some key statistics as well as fair value estimates for the top 10 stocks. To estimate fair value, I use a multi-stage DDM analysis with proprietary adjustments. 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.
In the table, Yrs are the years of consecutive dividend increases, Payout is the EPS (earnings per share) payout ratio, and Debt is the ratio of debt to equity. 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 and Financial Strength ratings also are provided. Finally, I present my own estimate of Fair Value, along with a calculation of the current discount to fair value (Discount). Unless otherwise indicated, data are from the CCC spreadsheet.
Finbox.io provides a comprehensive set of analysis tools to estimate fair value. Below I include snapshots for the four stocks in the top 10 that I don't own:
Finbox.io includes range visualizers for its own estimates and for Wall Street analysts' targets and the stock's 52-week trading range. I like the analysis tools because you can adjust several input parameters based on your own assumptions and see the impact on the fair value estimate. Except for BEN, Finbox.io's fair value estimates are somewhat higher than mine.
Top 10 Snowflakes
Simply Wall St offers various analysis and visualization tools. A particularly useful infographic is the so-called Snowflake, a visual summary of 30 different checks that the company performs when analyzing stocks.
Each snowflake represents Value, Future, Past, Health, and Dividend scores.
The Value score indicates how undervalued a stock is. The Future score represents growth expectations based on analyst estimates, while the Past score captures a stock's past performance. The Health score considers a company's balance sheet and debt levels, and the Dividend score measures the quality and sustainability of a company's dividend.
The color of each snowflake changes from red to green depending on the number of checks a stock passed.
Below is a snowflake matrix of this month's Top 10 stocks. I included an overlay of the scores for value, future, past, health, and dividend so readers can get a sense of how shapes correlate with scores.
What I like about these snowflakes is how easy it is to recognize quality stocks. Specifically, stocks with greener snowflakes passed more checks than stocks with yellower snowflakes.
Since the one-year anniversary of monthly 10 Dividend Growth Stocks article series, I've been looking back to see how my year-ago selections performed. Here's a chart showing the price performance (excluding dividends) of my top 10 ranked stocks from May 2016:
The arithmetic average of these returns is 5.7%. In comparison, the Vanguard Dividend Appreciation ETF (VIG) returned 12.2% over the same period (excluding dividends).
The performance of my year-ago selection was dragged down by V. F. Corporation (VFC) and HRL, which happens to be the number one ranked stock in this month's top 10!
| 1-Year |
| Top 10 Ranked |
Dividend Growth Stocks
|Vanguard Dividend |
Appreciation ETF (NYSEARCA:VIG)
Please note that I'm comparing the performance of last year's top 10 ranked stocks to VIG's performance for fun. It is quite obvious that a diversified ETF like VIG would have a superior risk profile.
With my monthly 10 Dividend Growth Stocks articles, I rank a selection of the CCC stocks and present the top 10 ranked stocks as candidates for further analysis. This month's selection favors dividend growth stocks with lower price-to-sales ratios and lower debt.
Of the top 10 ranked stocks I don't own, I'm most interested in MGA and CAH, which are trading at discounts of about 24% and 12%, respectively.
Please note that the top 10 ranked stocks are candidates for further analysis, not recommendations.
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Disclosure: I am/we are long CVS, GD, HRL, MMM, NKE, QCOM.
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.