10 Dividend Growth Stocks For September 2018

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Includes: ACN, CMCSA, CMI, CVS, HD, HRL, KRG, LOW, MO, OHI, ROST, SBUX, T, TJX, TROW, TXN, UNH, WBA
by: FerdiS

Summary

I rank a selection of the CCC stocks and present 10 stocks worthy of consideration.

This month I ranked 240 stocks, which is significantly more than usual.

Ranking so many stocks allows me to identify top-ranked stocks by sector, but also reveals some issues with my ranking system, which I'll address in a future article.

Like many dividend growth investors, I use the CCC list as a starting point for my research. The list contains nearly 900 stocks trading on U.S. exchanges with the distinction of having paid higher dividends for at least 5 consecutive years.

With my monthly 10 Dividend Growth Stocks series, I rank a subset of stocks from the CCC list and identify the 10 top-ranked stocks for further research.

Trimming the CCC List

The latest CCC list (dated 8/31/18) contains 896 stocks.

This month I combined several lists and retained only stocks that also appear in the CCC list and pass several other screens.

The starting list is one I recently used to find Quality Dividend Growth Stocks I don't yet own. I compiled the list by referencing 16 different portfolios and retaining stocks that appear in at least two of these portfolios. See the linked article for details on the 16 referenced portfolios.

Then I added stocks from the following well-known lists:

  • Dividend Aristocrats — companies in the S&P 500 Index that have increased their dividends every year for 25 straight years.
  • Dividend Kings — companies that have increased their dividend for at least 50 straight years.
  • Dividend Contenders — stocks trading on U.S. exchanges with higher dividend payments in 10-24 consecutive years.
  • Dividend Champions —stocks trading on U.S. exchanges with higher dividend payments in 25 or more consecutive years.

Obviously, there are lots of overlap between these lists. Still, the combined list contains well over 350 stocks and I wanted to somewhat limit the work needed to rank them.

So I trimmed the combined list using the following screens:

  • Only CCC stocks
  • Market cap ≥ $1 billion
  • Dividend Yield ≥ 1.0%
  • No stocks being acquired
  • No Over-The-Counter or Pink Sheet stocks
  • No stocks with Unsafe or Very Unsafe dividend scores as rated by Simply Safe Dividends.

As a final step, I added the dividend growth stocks in my DivGro portfolio (or at least the ones not already in the list). The final list contains 240 stocks.

Below is an analysis of these stocks, courtesy of finbox.io:

Collectively, the stocks have a fair value downside of about 7.5%, but they show a strong 1-year return of 18.2%. Furthermore, the stocks have outperformed the S&P 500 by about 29% over the last five years.

The Ranking Process

I ranked all 240 candidates using data available in the CCC spreadsheet and additional sources like Finviz.com, Morningstar, F.A.S.T. Graphs, finbox.io, and Simply Safe Dividends. This is the first time I've ranked so many candidates!

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.

Top 10 Ranked Stocks for September 2018

Last Month's List: 10 Dividend Growth Stocks For August 2018

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, CMCSA9 means CMCSA was ranked ninth last month.

Ratings and Sectors

Here are the top 10 ranked stocks by sector, along with my star ratings for each stock (out of 7 stars). The top four stocks each earned 7 stars, while the remaining stocks each earned 6-star ratings. I consider stocks with a 5-star rating or better worthy of further analysis:

1 • Comcast (CMCSA)✭✭✭✭✭✭✭ Consumer Discretionary

Founded in 1963 and headquartered in Philadelphia, Pennsylvania, CMCSA is a media and technology company. The company's Comcast Cable business provides video, Internet, and voice services to residential customers under the XFINITY brand. CMCSA’s NBC Universal business consists of cable networks, broadcast television, filmed entertainment, and theme parks.

2 • Cummins (CMI)✭✭✭✭✭✭✭ Industrials

Founded in 1919 and headquartered in Columbus, Indiana, CMI is one of the leading designers and manufacturers of diesel engines. The company also produces natural gas engines and engine components and subsystems. CMI sells its products to original equipment manufacturers, distributors, and other customers worldwide.

3 • Lowe's (LOW)✭✭✭✭✭✭✭ Consumer Discretionary

Dividend Champion LOW is a home improvement retailer. The company offers a complete line of products for maintenance, repair, remodeling, and home decorating. It also offers installation services through independent contractors, as well as extended protection plans and repair services. LOW was founded in 1946 and is based in Mooresville, North Carolina.

4 • Home Depot (HD)✭✭✭✭✭✭✭ Consumer Discretionary

Founded in 1978 and based in Atlanta, Georgia, HD is a home improvement retailer that sells an assortment of building materials, home improvement products, and lawn and garden products. HD provides installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me, and professional customers.

5 • TJX (TJX)✭✭✭✭✭✭✩ Consumer Discretionary

Founded in 1956 and based in Framingham, Massachusetts, TJX operates as an off-price apparel and home fashions retailer in the United States and internationally. The company sells family apparel, home fashions, seasonal items, jewelry, and other merchandise. TJX operates stores under various names, including T.J. Maxx, Marshalls, and Sierra Trading.

6 • UnitedHealth (UNH)✭✭✭✭✭✭✩ Healthcare

Founded in 1974 and based in Minnetonka, Minnesota, UNH is a diversified health and well-being company with core capabilities in clinical expertise, advanced technology, and data and health information. The company provides medical benefits to customers in the United States and in more than 125 other countries.

7 • Ross Stores (ROST)✭✭✭✭✭✭✩ Consumer Discretionary

ROST, together with its subsidiaries, operates off-price retail apparel and home fashion stores offering apparel, accessories, footwear, and home fashions. The company's stores include Ross Dress for Less stores and dd's DISCOUNTS stores. ROST was founded in 1982 and is headquartered in Dublin, California.

8 • Texas Instruments (TXN)✭✭✭✭✭✭✩ Information Technology

TXN designs, manufactures and sells semiconductors to electronics designers and manufacturers globally. The company operates through two segments, Analog and Embedded Processing. It markets and sells semiconductor products through a direct sales force and through distributors, as well as online. TXN was founded in 1930 and is headquartered in Dallas, Texas.

9 • Accenture Plc (ACN)✭✭✭✭✭✭✩ Information Technology

Founded in 1989 and is based in Dublin, Ireland, ACN provides management and technology consulting services to clients in various industries and geographic regions, including North America, Europe, and Growth Markets. ACN’s operating segments are Communications, Media & Technology; Financial Services; Health and Public Service; Products; and Resources.

10 • Hormel Foods (HRL)✭✭✭✭✭✭✩ Consumer Staples

Dividend Champion HRL is a multinational manufacturer and marketer of consumer-branded food and meat products. The company sells its products through sales personnel, as well as through independent brokers and distributors. Customers include retailers, hospitals, nursing homes and marketers of nutritional products. HRL was founded in 1891 and is based in Austin, Minnesota.

Please note that the top 10 ranked stocks are candidates for further analysis, not recommendations.

The table below presents some key metrics as well as fair value estimates for the top 10 stocks.

In the table, Yrs are the years of consecutive dividend increases, Payout is the EPS payout ratio and Debt is the ratio of debt to equity. When available, the compound dividend growth rate over a 5-year period (5-Yr DGR) is provided. Standard & Poor's Credit Rating, as well as Value Line's Safety and financial strength (Fin. Strength) ratings also are provided. I've added the Safety score (out of 100) from Simply Safe Dividends. Finally, I present my own estimate of Fair Value.

To estimate fair value, I calculate my own fair value estimates using proprietary implementations of the multi-stage Dividend Discount Model and the Gordon Growth Model. I also reference fair value estimates and target prices from other sources, including Morningstar, finbox.io, and Simply Wall St. With up to nine estimates available, my final fair value estimate ignores the lowest and highest, then averages the median and mean of the remaining estimates.

Commentary

Only two stocks are trading at a discount to fair value: CMCSA and CMI. However, TXN is trading only 3% above fair value and is worth taking a look at, too.

My CMCSA position is relatively small at about 1.05% of total portfolio value. I'm considering adding to my CMCSA position, especially if I can buy shares below $35 per share.

In comparison, my CMI position is underweight at 0.90% of total portfolio value. I'll be adding shares as soon as I can spare additional cash.

TXN has dropped about $5 per share in recent days, so it looks like I'll have an opportunity to add to another underweight position! TXN is 0.79% of DivGro's total portfolio value.

Neither one of the two top 10 stocks I don't own is trading near fair value. HD is about 12% above my fair value estimate, while ACN is trading about 20% above fair value. I'm thinking about opening a small position in HD so I can track the stock more closely along with my existing stocks. I'm very impressed with the stock's consistency, as evidenced in the following F.A.S.T. Graphs chart:

The chart confirms that HD is trading above fair value, as the stock price (the black line) is above the stock's normal P/E ratio (the blue line) and also above the so-called primary valuation line (the orange line).

Concluding Remarks

This month I ranked 240 stocks, which is significantly more than I usually do!

One advantage of ranking so many stocks is that I can review the top-ranked stocks by sector. In a future article, I'll do just that! I think dividend growth investors will find it useful to see which stocks top the sector lists!

Ranking so many stocks also revealed some issues with my ranking system. I've been suspicious of how well my ranking system ranks REITs (real estate investment trusts) relative to other stocks. The key metrics used to evaluate the financial position and operation of REITs are different than those used for regular stocks. REIT-specific metrics include NAV (net asset value), FFO (funds from operations), and AFFO (adjusted funds from operations). The CCC spreadsheet does not provide such REIT-specific metrics.

Furthermore, several of the other data sources I use in my ranking system do not cover REITs. In fact (although to a lesser extent), they also do not provide sufficient coverage of Financial sector stocks.

To illustrate my point about REITs, here are the top 10 discounted stocks along with their ranks and ratings:

Note that Kite Realty Group Trust (KRG) is the lowest ranked stock! Also note that another of my DivGro stocks, Omega Healthcare Investors (OHI), is ranked #228. I feel that both these stocks "deserve" higher ranks than those assigned by my ranking system. I think it is time to revisit my ranking system to address these issues!

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Disclosure: I am/we are long AAPL, ABBV, AFL, CB, CMCSA, CMI, CSCO, CVS, D, DGX, DIS, ES, GD, HASI, HRL, IBM, ITW, JNJ, KO, KRG, LMT, LOW, MAIN, MCD, MDT, MMM, MO, MSFT, NEE, NKE, NNN, NVDA, O, OHI, PFE, PG, QCOM, ROST, RTN, SBUX, SWK, T, TJX, TROW, TRV, TXN, UNH, UPS, VLO, VZ, WBA, WMT, XEL, XLNX, XOM.

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.