Undervalued Dividend Growth Stocks: February 2019

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Includes: AIZ, AMGN, AMP, AMTD, BBT, BBY, BLK, CMCSA, DFS, DLR, EMN, ETN, FAF, HUBB, INGR, ITW, JPM, LMT, LNC, LOW, MAN, MGA, NDAQ, NTAP, OMC, PKG, PNC, SNA, SPG, STT, TGT, TSN
by: The Part-time Investor
Summary

I have developed my KISS screen for identifying undervalued dividend growth stocks.

I run the screen each month to look for buying opportunities.

I present here the stocks that passed the KISS screen this month.

Over the past 6 years, I have developed my K.I.S.S. system for investing in dividend growth stocks. The KISS system is a screen that I use each month to identify undervalued dividend growth stocks that I might consider adding to my portfolio. I post my portfolio update each quarter to show all the transactions I make and how the portfolio is doing. My next update will be out in a few days, but the one from the third quarter of 2018 can be found here.

Up until now, I have only shown the stocks I decided to purchase. But I have decided that I'm going to start sending out the list of all the stocks that passed the KISS screen, so that people can see how the screen works, all the stocks that passed the screen and have a good list of some potentially undervalued stocks for them to research.

Having said that, let me stress that nothing I present here is, or should be considered to be, a recommendation to buy any of these stocks. Every investor should do their own research before buying any stock, including the ones presented here.

Before I present the list of passing stocks, let me present the actual screening system I use.

The K.I.S.S. System

For the Purchase of Regular Stocks

  • The stock must be on the Dividend Champions, Contenders and Challengers ("CCC") list (as previously compiled by David Fish, but now compiled by Justin Law); (Thank you, David. You will be missed. I couldn't have done any of this without you)
  • The payout ratio is < 60%;
  • For stocks with a yield between 2.0% and 2.5%, the Chowder Number (Dividend yield + 5-yr dividend growth rate) >16;
  • For stocks with a yield between 2.5% and 3.0%, the Chowder Number (Dividend yield + 5-yr dividend growth rate) >14;
  • For stocks with a yield greater than 3.0%, the Chowder Number (Dividend yield + 5-yr dividend growth rate) >12;
  • A credit rating of BBB- or better from S&P (found on F.A.S.T. Graphs); and
  • F.A.S.T. Graphs shows a 10-year uptrend in earnings and shows that the stock is not overvalued.

The Chowder number is the 5-year dividend growth rate plus the present dividend yield. The use of different Chowder Number requirements is a change I made to my criteria over the past few years. I prefer to have stocks with higher yields, but if the rest of the story is compelling enough, I am willing to buy stocks with yields in the 2.0% to 3.0% range if their DGRs and Chowder Numbers are higher, as shown in my criteria above. Please see a previous article I wrote about different yields, DGRs and Chowder Numbers to read about my thinking on this topic.

For Purchase of MLPs, REITs, Utilities, and Telecoms (High Yielders)

  • The stock is on CCC list;
  • Yield > 4%;
  • Chowder Number > 8%;
  • DGR for all time periods (1-yr., 3-yr., 5-yr. and 10-yr.) at least 4.0%;
  • F.A.S.T. Graph shows a 10-year uptrend (or for the life of the company, if less than 10 years) in funds from operations ("FFO"); and
  • F.A.S.T. Graph shows that the stock is not overvalued based on its FFO.

And I have just added the following criteria to both my screens. To make the cut all the stock must have a score of 61 or above from “Simply Safe Dividends.”

The time it takes to run this screen is only about 3 hours per quarter since most of the work has already been done for me by way of the CCC list, F.A.S.T. Graphs, Simply Safe Dividends and S&P.

The evaluation of the FAST Graph part of the screen is a very subjective component of the system. One person could look at the FAST Graph of a stock and say it passed, while someone else could look at it and say it failed. I need to see a steady increase in the earnings over the past 10 years (or more), while seeing that the stock price is below the fair valuation for that stock. Here are a few examples of the FAST Graphs for some of the stocks below to show what I consider to be a passing stock.

Comcast (CMCSA)

Eastman Chemical (EMN)

Digital realty Trust (DLR)

The top two stocks show a steady uptrend in earnings (the blue and orange lines), and the price (the black line) has either dropped below these lines, indicating that the stock is undervalued (EMN), or is sitting on the earnings line showing that it is fairly valued (CMCSA).

The third graph shows the Operating Cash Flow ("OCF") lines (blue and orange) for Digital realty, showing that its OCF has a steady uptrend, and that the price line is at or just slightly above, the fair value line based on the OCF. If a stock is at fair value, such as DLR appears to be, I will accept it as one of the passing stocks.

So, after running the above screens, here are the stocks which passed:

February Passing Stocks

Company

Ticker

Div.

EPS%

Chowder

Name

Symbol

Sector

Industry

Yield

Payout

Rule

Assurant Inc.

AIZ

Financials

Insurance

2.49

38.28

21.4

Amgen Inc.

AMGN

Health Care

Biotechnology

3.10

47.82

26.0

Ameriprise Financial Inc.

AMP

Financials

Capital Markets

2.84

26.73

14.8

TD Ameritrade Holding Corp.

AMTD

Financials

Capital Markets

2.14

38.34

21.1

BB&T Corp.

BBT

Financials

Banks

3.32

41.43

13.8

Best Buy Corp.

BBY

Consumer Discretionary

Specialty Retail

3.04

37.82

24.5

BlackRock Inc.

BLK

Financials

Capital Markets

3.02

47.03

15.3

Comcast Corp.

CMCSA

Communication Services

Media

2.30

34.29

16.5

Discover Financial Services

DFS

Financials

Consumer Finance

2.37

19.75

17.5

Eastman Chemical Co.

EMN

Materials

Chemicals

3.08

29.77

16.4

Eaton Corp. plc

ETN

Industrials

Electrical Equipment

3.46

55.46

12.9

First American Financial Corp.

FAF

Financials

Insurance

3.35

38.80

30.6

Hubbell Inc.

HUBB

Industrials

Electrical Equipment

3.07

52.91

14.3

Ingredion Inc.

INGR

Consumer Staples

Food Products

2.53

38.82

14.1

Illinois Tool Works

ITW

Industrials

Machinery

2.91

53.55

19.4

JPMorgan Chase & Co.

JPM

Financials

Banks

3.09

35.60

15.9

Lockheed Martin

LMT

Industrials

Aerospace & Defense

3.04

51.10

14.4

Lincoln National Corp.

LNC

Financials

Insurance

2.53

42.90

25.0

Lowe's Companies

LOW

Consumer Discretionary

Specialty Retail

2.00

42.48

23.2

ManpowerGroup Inc.

MAN

Industrials

Professional Services

2.56

24.88

19.6

Magna International Inc.

MGA

Consumer Discretionary

Auto Components

2.49

19.73

18.1

Nasdaq Inc.

NDAQ

Financials

Capital Markets

2.00

44.78

28.7

NetApp Inc.

NTAP

Information Technology

Technology Hardware, Storage & Peripherals

2.51

38.19

34.5

Omnicom Group Inc.

OMC

Communication Services

Media

3.08

41.81

12.9

Packaging Corp of America

PKG

Materials

Containers & Packaging

3.35

44.01

19.2

PNC Financial Services Group Inc.

PNC

Financials

Banks

3.10

35.38

17.7

Snap-on Inc.

SNA

Industrials

Machinery

2.29

33.87

18.9

State Street Corp.

STT

Financials

Capital Markets

2.65

29.33

14.4

Target Corp.

TGT

Consumer Discretionary

Multiline Retail

3.51

49.14

13.3

Tyson Foods Inc.

TSN

Consumer Staples

Food Products

2.42

28.46

43.9

High Yield Stocks

Company

Ticker

DGR

DGR

DGR

DGR

Name

Symbol

Sector

Industry

1-yr

3-yr

5-yr

10-yr

Digital Realty Trust

DLR

Real Estate

Equity Real Estate Investment Trusts (REITs)

6.5

5.2

4.9

12.3

Simon Property Group Inc.

SPG

Real Estate

Equity Real Estate Investment Trusts (REITs)

10.5

9.3

12.6

8.8

Conclusion

For those interested in dividend growth investing, I believe the key to being successful is addressing the following criteria:

  • The dividend history
  • The dividend growth rate
  • The dividend yield
  • The dividend safety
  • The payout ratio
  • The earnings history
  • Valuation

I believe my KISS screen successfully incorporates all of these. Every month, I will post the stocks that pass my screen, so that readers can evaluate it and perhaps get some benefit from it.

Thank you for reading. I welcome your comments and criticisms.

Disclosure: I am/we are long DLR, AMGN. 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.