The Best Dividend Stocks To Buy During This Correction

by: Dividend Sensei

Market corrections are a fantastic time to go bargain hunting for quality dividend growth stocks.

Readers have been asking me for my top recommendations to make the most of the latest market downturn.

This new weekly series will highlight the most undervalued, quality dividend growth stocks worth buying at any given time.

This week, there are 18 undervalued dividend growth stocks that are my top picks for new money.

Going forward, these weekly updates will be tracking the total returns of these recommendations, to show the power of long-term deep value dividend growth investing.

(Source: Imgflip)

Note that due to reader requests, I've decided to break up my weekly portfolio updates into three parts: commentary, economic update, and the new "best stocks to buy right now" series. This is to avoid excessively long articles and maximize the utility to my readers.

This week's commentary explains why you should stop watching the stock market and focus on these three more important things instead.

This week's economic update looks at what the risks of a global recession REALLY are.


As I explained in my portfolio update 63, I'm now focused on paying down margin and thus won't be making changes to my portfolio for the foreseeable future. With no changes to track, I'll be shifting to a quarterly portfolio update schedule. However, since something great is always on sale, and my goal is to help readers put their money to work in quality, undervalued dividend growth stocks, I will be launching a new series, the "best dividend stocks you can buy today".

This is my collection of watchlists for Grade A quality dividend growth blue-chips that make fantastic buys right now. If you've wondered "where should I put my money today?" this list is it. The goal is to highlight stocks that can realistically deliver 13+% long-term total returns (over the next decade) via a combination of yield, long-term cash flow/dividend growth, and valuation returning to fair value.

I use the same valuation-adjusted total return model that Brookfield Asset Management (BAM) uses and they have a great track record of delivering 12% to 15% CAGR total returns (in fact, it's their official goal as a company and they usually exceed that target).

There are four carefully curated lists designed to focus on:

  • quality companies
  • safe dividends (they are all low-risk stocks)
  • strong long-term growth potential
  • the maximum margin of safety (dirt cheap valuations)

And to show the power of long-term, deep value dividend growth investing I'm also going to be tracking these recommendations going forward. That's in my Deep Value Dividend Growth Portfolio or DVDGP.

This is a paper portfolio I'll be maintaining on Morningstar and Simply Safe Dividends to not just provide in-depth portfolio stats but also the total returns over time.

The rules for the portfolio are:

  • each month, I buy $500 worth (rounded up to the nearest whole share) of that week's recommendation for the portfolio
  • dividends are reinvested
  • stocks are only sold if the thesis breaks or a stock becomes 25% overvalued (then sell half) or 50% overvalued (sell all of it), capital is reinvested into new recommendations

In the event that a new stock makes it onto my Bear Market Buy List Top 10 (I'm constantly adding new stocks to that), then that week, I'll also buy $500 worth of that (that month's buy for that stock).

Again, this is purely a tracking (paper) portfolio. I'm not yet putting real money into it (though I may end up making it my official investing approach starting in 2020 when my margin is gone and I finally have dry powder available). The purpose is to try to show how someone with a modestly high savings rate (buying stocks about once per month) would do following this highly disciplined and rules-based approach.

So, with that out of the way, here are the best quality dividend growth stocks you can buy today.

The Best Dividend Growth Stocks You Can Buy Today

This group of dividend growth blue chips represents what I consider the best stocks you can buy today. They are presented in four categories, sorted by most undervalued (based on dividend yield theory using a 5-year average yield).

  • High yield (4+% yield)
  • Fast dividend growth
  • Dividend Aristocrats
  • My Bear Market Buy List Top 10

Note there may be some overlap between these groups. To help with further research, I've linked to my articles for each recommendation (those not behind a paywall).

The goal is to allow readers to know what are the best low-risk dividend growth stocks to buy at any given time. You can think of these as my "highest-conviction" recommendations for conservative income investors. Note these are not meant to represent a diversified or complete portfolio, but merely highlight the best opportunities for low-risk income investors available in the market today.

The valuations are determined by dividend yield theory, which Investment Quality Trends, or IQT, has proven works well for dividend stocks since 1966, generating market-crushing long-term returns with far less volatility.

(Source: Investment Quality Trends)

That's because, for stable business income stocks, yields tend to mean-revert over time, meaning cycle around a relatively fixed value approximating fair value. If you buy a dividend stock when the yield is far above its historical average, then you'll likely outperform when its valuation returns to its normal level over time.

For the purposes of these valuation-adjusted total return potentials, I use the Gordon Dividend Growth Model or GDGM (which is what Brookfield Asset Management uses). Since 1956, this has proven relatively accurate at modeling long-term total returns via the formula: Yield + dividend growth. That's because, assuming no change in valuation, a stable business model (doesn't change much over time) and a constant payout ratio, dividend growth tracks cash flow growth.

The valuation adjustment assumes that a stock's yield will revert to its historical norm within 10 years (over that time period, stock prices are purely a function of fundamentals). Thus, these valuation total return models are based on the formula: Yield + projected 10-year dividend growth (analyst consensus, confirmed by historical growth rate) + 10-year yield reversion return boost.

For example, if a stock with a historical average yield of 2% is trading at 3%, then the yield is 50% above its historical yield. This implies the stock is (3% current yield - 2% historical yield)/3% current yield = 33% undervalued. If the stock mean-reverts over 10 years, then this means the price will rise by 50% over 10 years just to correct the undervaluation.

That represents a 4.1% annual total return just from valuation mean regression. If the stock grows its cash flow (and dividend) at 10% over this time, then the total return one would expect from this stock would be 3% yield + 10% dividend (and FCF/share) growth + 4.1% valuation boost = 17.1%.

Top 5 High-Yield Blue Chips To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 10 Year Annualized Dividend Growth

Valuation Adjusted Total Return Potential

Enbridge (ENB) Energy 6.9% 3.8% 2.3% to 6.6% 45% 6% 18.6%
Tanger Factory Outlet Centers (SKT) REIT 5.9% 3.5% 2.2% to 6.8% 41% 4.7% 15.9%
Kimco Realty (KIM) REIT 6.8% 4.1% 2.7% to 24.5% 40% 3.8% 16.6%
Brookfield Property Partners (BPY) REIT (uses K1) 7.6% 4.9% 1.2% to 7.4% 36% 6.5% 18.5%
Altria (MO) Consumer Staples 6.1% 4.0% 3.1% to 14.4% 33% 8% 17.8%

(Sources: Management guidance, GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, Dividend Yield Theory, Gordon Dividend Growth Model)

Top 5 Fast-Growing Dividend Blue Chips To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 10 Year Annualized Dividend Growth

Valuation Adjusted Total Return Potential

A.O. Smith (AOS) Industrials 2.1% 1.1% 0.8% to 3.4% 47% 9.9% 16.8%
FedEx (FDX) Industrial 1.4% 0.7% 0.3% to 1.2% 46% 13.1% 19.6%
Thor Industries (THO) Consumer Discretionary 2.9% 1.6% 0.8% to 2.7% 43% 12.0% 19.6%
Snap-on (SNA) Industrials 2.6% 1.6% 1.2% to 5.6% 38% 11.0% 18.0%
Broadcom (AVGO) Tech 4.2% 3.0% 0.2% to 4.6% 29% 12.8% 20.7%

(Sources: GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, IQ Trends, Gordon Dividend Growth Model)

Top 5 Dividend Aristocrats To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 10 Year Annualized Dividend Growth

Valuation Adjusted Total Return Potential

A.O. Smith (AOS) Industrials 2.1% 1.1% 0.8% to 3.4% 47% 9.9% 16.8%
Cardinal Health (CAH) Healthcare 3.8% 2.1% 0.9% to 3.9% 43% 8.5% 18.0%
Altria (MO) Consumer Staples 6.1% 4.0% 3.1% to 14.4% 33% 8% 17.8%
Illinois Tool Works (ITW) Industrial 3.1% 2.1% 1.5% to 4.5% 32% 9.8% 16.4%
AbbVie (ABBV) Healthcare 5.0% 3.3% 0.9% to 5.5% 29% 10.9% 20.1%

(Sources: GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, IQ Trends, Gordon Dividend Growth Model)

My Bear Market Buy List Top 10

These are the top 10 stocks that I plan to buy during the next recession/bear market. That's when even blue-chip valuations will drop to levels that will be capable of generating the kind of strong 13+% total returns that my portfolio is targeting. Note that all total return estimates are for a 10-year annualized basis. That's because total return models are most accurate over longer time frames (5+ years) when prices trade purely on fundamentals and not sentiment. This allows valuations to mean-revert and allows for relatively accurate (80% to 95%) modeling of returns.

The list itself is ranked by long-term CAGR total return potential from target yield. Bolded stocks are currently at my target yield and thus "Strong Buys."

Company Current Yield Fair Value Yield/Share Price Target Yield Historical Yield Range Long-Term Expected EPS Growth (Analyst Consensus, Expected Dividend Growth)

Long-Term Valuation Adjusted Annualized Total Return Potential At Target Yield

BlackRock (BLK) 3.3% 2.5% 3.0% 1.2% to 3.5% 13.7% 19%
LeMaitre Vascular (LMAT) 1.1% 1.1% 1.1% 0.3% to 2.0% 17.5% 18%
Lazard (LAZ) 4.8% 2.8% 4.0% 0.8% to 4.8% 10.1% 18%
Texas Instruments (TXN) 3.3% 2.5% 2.9% 0.9% to 3.5% 12.6% 17%
Enterprise Products Partners (EPD) 6.7% 5.9% 7.2% 3.4% to 11.7% 5.9% 16%
Illinois Tool Works (ITW) 3.1% 2.2% 3.0% 1.6% to 4.5% 10.0% 16%
A.O Smith (AOS) 2.1% 1.1% 1.5% 0.8% to 3.4% 11.5% 16%
Broadcom (AVGO) 4.2% 3.0% 3.0% 0.2% to 4.6% 12.8% 16%
Apple (AAPL) 1.8% 1.7% 1.7% 0.4% to 2.8% 13.1% 15%
Berkshire Hathaway (BRK.B) 0% $164 NA NA 12.0% 15%

(Sources: Dividend Yield Theory, Gordon Dividend Growth Model, Simply Safe Dividends, GuruFocus, F.A.S.T. Graphs, Moneychimp)

This week, I added Lazard to the BMBL. The actual list is longer than 10 stocks, but I only show my top 10 selections, ranked by long-term total return potential from their target yields.

Note that the following stocks are at or above my target yield.

  • BLK
  • LMAT
  • LAZ
  • TXN
  • ITW
  • AOS
  • AVGO
  • AAPL

That makes it a great time to either add them to your portfolio or add to an existing position.

The Deep Value Dividend Growth Portfolio

(Source: Morningstar) - data as of Dec 12th close

Sector Concentration

(Source: Simply Safe Dividends)

Eventually, this portfolio is going to be diversified into every sector. However, since the goal is to buy the best bargains at any given time, it will take a while for new names to rotate off each week's list and into the portfolio.

Income Concentration

(Source: Simply Safe Dividends)

The portfolio's income is likely to be highly concentrated into the highest-yielding names, at least until it becomes more diversified over time.

Annual Dividends

(Source: Simply Safe Dividends)

The portfolio is starting out nicely balanced by monthly payouts (though I don't specifically target stocks by payout date).

(Source: Simply Safe Dividends)

Note that the 10-year dividend growth figures are artificially low because my tracking software doesn't average in anything that hasn't existed for those time periods. Some of these stocks have IPO-ed in the last five years, and so, the 1-year and 5-year growth rates are the most accurate. These figures are purely organic growth rates and assume no dividend reinvestment. The dividend declines during the Financial Crisis were due to REITs (Kimco) which cut its dividend (as 78 REITs did during the Great Recession). Fortunately, since then, the sector has deleveraged and enjoys the strongest sector balance sheet in history.

(Source: Hoya Capital Real Estate)

That means that, during the next recession, most REITs will NOT cut their payouts, especially Kimco, which has a BBB+ credit rating and will be getting an upgrade to A- in 2019 or 2020.

(Source: Simply Safe Dividends)

Fundamental Portfolio Stats

(Source: Morningstar)

The quality of these stocks can be seen in the far above average returns on assets and equity of this portfolio. What's more, it's also far more undervalued, offers a much higher yield, and has projected long-term EPS (and thus dividend growth) that's far superior to the broader market. As an added benefit, the average market cap is smaller, providing yet another alpha factor (smaller stocks tend to outperform).

Portfolio Performance

The portfolio is brand new, so there is nothing to report other than Friday's decline of 1.74% beat the market's 1.9% decline (beta of 0.92).

Bottom Line: Great Dividend Growth Stocks Are Always On Sale, But Especially During A Correction

I'm super excited to be launching this new series which I think will not just be more useful to my followers but also potentially far more profitable than my old portfolio update series. That's because these recommendations are designed for everyone, not just my own needs.

And with the market currently in a correction that has left even the highest quality dividend growth stocks trading at fire-sale prices, I couldn't be more thrilled to be pounding the table on these 18 Grade A long-term income growth recommendations this week.

Going forward, the portfolio is going to expand and become diversified into every nearly every sector, but with every single holding representing top quality companies, and bought at valuations that should allow for truly spectacular long-term returns.

Disclosure: I am/we are long ENB, KIM, BPY, BLK, ITW, TXN, AOS, AAPL, ABBV. 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.