The Best Dividend Stocks For New Money Today

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Includes: AAPL, ABBV, AMGP, AMP, AMT, AMTD, AOS, APD, AVGO, AXP, AY, BA, BAC, BAM, BEP, BIP, BLK, BMY, BPR, BTI, C, CAH, CCI, CL, CONE, CVS, CVX, D, DIS, DLR, EMR, ENB, EPD, EPR, EPRT, EQIX, EQM, ET, FDX, FRT, GD, GS, HD, HOMB, HRL, IRM, ITW, JKHY, JPM, KIM, KO, LAZ, LMAT, LRCX, LYB, MA, MMM, MMP, MO, MPLX, MRK, MSFT, NBLX, NEP, O, OKE, OMP, PM, PPG, QCOM, QTS, ROP, SKT, SNA, SPG, STOR, SU, SWKS, SYF, TERP, THO, TRP, TU, TXN, V, VOD, WBA, WELL, WM, WPC, XOM
by: Dividend Sensei
Summary

The stock market is having a great start to the year with the S&P 500 up 11.0% YTD. Finding new companies to put new money to work is getting harder.

No matter how high the market soars, something great is always on sale. DVDGP owns 33 Morningstar 4 and 5 star rated companies.

It also owns 35 companies trading at 15 times forward earnings or less.

This week, there are 63 active buy recommendations from the Deep Value Dividend Growth Portfolio's five watchlists.

These include high-yield blue-chips, fast growers, as well as Dividend Aristocrats and Kings. Each of these companies is a great place to put new money to work today.

(Source: imgflip)

Note that due to reader requests, I've decided to break up my weekly "Best Dividend Stocks To Buy This Week" series into two parts.

One will be the weekly watchlist article (with the best ideas for new money at any given time). The other will be the update on the Deep Value Dividend Growth Portfolio (which is beating the market by 10.7% so far and across all time frames).

To also make those more digestible, I'm breaking out the intro for the weekly series into a revised introduction and reference article on the 3 rules for using margin safely and profitably (which will no longer be included in those future articles).

Why Valuation Matters

Even the best companies can make terrible investments if you overpay. A Yale study looking at market returns from 1881 to 2016 found that starting P/E ratio had a significant effect on total returns out to 30 years. In other words, buy-and-hold investors can't just blindly buy great companies at any price but need to remember Buffett's famous quote: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

The corollary to that quote is what I call "the Buffett rule," which is to never pay more than fair value for even the highest-quality companies. Doing so will lower your total returns, and since something great is always on sale, there is no reason to jump the gun on buying quality, low-risk dividend stocks.

After all, patience is the ultimate virtue of the long-term investor, because as Buffett also said, "the stock market is designed to transfer money from the active to the patient."

But there's another reason why valuation is always worth keeping in mind.

(Source: Ploutos Research)
Note: Data current through January 2019

Value investing is one of the proven "alpha factors" that consistently beat the market over time. That includes January's rally (the strongest S&P returns in January in 32 years), when value stocks were the best alpha strategy of all.

Of course, value investing doesn't work all of the time - no investing strategy does.

Probability Of The Strategy Underperforming The S&P 500 Over Rolling Time Periods

(Source: Advisor Perspectives)

But it's precisely because all investing strategies go through periods of underperformance that alpha factors keep working over decades. If any single approach could guarantee market-beating returns year in and year out, then everyone in the world would use it, and thus, the strategy would lose its edge.

Ok, so maybe value investing is great, and valuation worth keeping in mind before buying any stock. But how does one find great companies trading at Buffett's mythical "fair value." Well, there are many approaches, but I personally consider three the most useful for long-term dividend growth investors.

Discounted Cash Flow

Fundamentally, any company is worth the present value of all its future cash flow. That's as basic a valuation method as you can get. However, in reality, the future is uncertain, and the discount rate you use, as well your growth assumptions, can make a DCF model say pretty much anything you want.

This is why I consider Morningstar's 100% long-term, fundamentals-driven and conservative analysts to be a great source of DCF estimated fair values.

(Source: Morningstar)
Note: "Q" indicates valuation relative to industry peers

Those analysts generally assume slower growth than the analyst consensus and even sometimes management itself. As a result, Morningstar four and five star rated companies can be thought of as "strong buy" or "very strong buy" recommendations, respectively, from analysts whom I consider among the best in the business.

Above you can see the top-rated companies that my Deep Value Dividend Growth portfolio owns. Every company presented here is one that my own long-term, valuation-adjusted total return model (based on the one Brookfield Asset Management has been using for decades) expects to generate at least 13% long-term total returns (margin of error 20%).

Note that only the companies with "5-star prices" are ones that Morningstar has done a deep dive on. The "Q" rated companies are merely compared to their peer groups, and thus, not necessarily as reliable.

But DCF is far from the only valuation method you should consider.

Price-To-Earnings

Remember that Yale valuation study that looked at stocks based on P/E ratio? Well, the venerable P/E ratio is one of the most popular valuation approaches, and for good reason. While no valuation method is perfect, a good rule of thumb (from Chuck Carnevale, the SA king of value investing and founder of F.A.S.T Graphs) is to never pay more than 15 times forward earnings for a company.

(Source: Tipranks)

Chuck usually compares companies to their historical P/E ratios, and he's ranked in the top 1.5% of all analysts tracked by Tipranks (based on the forward 12-month total returns of his recommendations). While 12 months is hardly "long term," the point is that Mr. Carnevale is a fantastic value investing analyst, and so, his rule of thumb is well worth keeping in mind.

Here's DVDGP's portfolio sorted by forward P/E:

(Source: Morningstar)

Note that stewardship ratings is Morningstar's estimate of the quality of the management team. P = poor (DVDGP's policy is to avoid all such companies), S = standard (average to good), and E = exemplary (very good to excellent).

But while both DCF and forward P/E are great methods to value a company, personally my absolute favorite, and what I use to invest my own money and make most of my recommendations, is Dividend Yield Theory, or DYT. This is how I create my 5 watchlists, which I intend to use to invest all my savings for the rest of my life.

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 five 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
  • Dividend Kings
  • My Bear Market Buy List (my master watchlist of quality low-risk dividend stocks worth owning)

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 that represent what I consider to be the best opportunities for low-risk income investors available in the market today. Over time, a portfolio built based on these watchlists will be highly diversified, low-risk and a great source of safe and rising income over time.

The rankings are based on the discount to fair value. 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%.

The historical margin of error for this valuation-adjusted model is about 20% (the most accurate I've yet discovered).

Top 5 High-Yield Blue-Chips To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 5-Year Annualized Cash Flow Growth

Valuation-Adjusted Total Return Potential

Tanger Factory Outlet Centers (SKT) REIT 6.4% 3.5% 2.2% to 6.8% 44% 4.8% 16.8%
Altria (MO) Consumer Staples 6.6% 4.0% 3.1% to 14.4% 39% 8% 18.7%
Enbridge (ENB) Energy 6.2% 3.8% 2.3% to 6.6% 35% 6% 18.7%
Kimco Realty (KIM) REIT 6.3% 4.1% 2.7% to 24.5% 35% 3.6% 15.4%
Magellan Midstream Partners (uses K-1) (MMP) Energy 6.8% 5.0% 2.7% to 12.0% 32% 6.5% 17.2%

(Sources: Management guidance, GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, Dividend Yield Theory, Gordon Dividend Growth Model) Note: Margin of error on total return potential is 20%.

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 5-Year Annualized Cash Flow Growth

Valuation-Adjusted Total Return Potential

FedEx (FDX) Industrial 1.5% 0.7% 0.3% to 1.5% 45% 13.5% 20.3%
A.O. Smith (AOS) Industrials 1.7% 1.1% 0.8% to 3.4% 34% 8.9% 15.0%
Snap-On (SNA) Industrials 2.4% 1.6% 1.2% to 5.6% 33% 9.8% 16.1%
Thor Industries (THO) Consumer Discretionary 2.3% 1.6% 0.8% to 2.7% 28% 10.0% 15.9%
Illinois Tool Works (ITW) Industrial 2.8% 2.1% 1.5% to 4.5% 24% 9.3% 14.7%

(Sources: Management guidance, GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, Dividend Yield Theory, Gordon Dividend Growth Model) -note margin of error on total return potential is 20%.

Top 5 Dividend Aristocrats To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 5-Year Annualized Cash Flow Growth

Valuation-Adjusted Total Return Potential

Cardinal Health (CAH) Healthcare 3.4% 2.1% 0.9% to 3.9% 35% 4.8% 13.1%
AbbVie (ABBV) Healthcare 5.3% 3.6% 0.9% to 5.5% 32% 10.0% 18.9%
Walgreens Boots Alliance (WBA) Consumer Staples 2.4% 1.9% 1.0% to 3.1% 22% 9.5% 14.7%
Exxon Mobil (XOM) Energy 4.2% 3.5% 1.5% to 4.8% 15% 6.5% 12.6%
PPG Industries (PPG) Materials 1.8% 1.5% 1.1% to 7.1% 14% 8.9% 12.2%

(Sources: Management guidance, GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, Dividend Yield Theory, Gordon Dividend Growth Model) Note: Margin of error on total return potential is 20%.

Top 5 Dividend Kings To Buy Today

Company Ticker Sector Yield Fair Value Yield Historical Yield Range Discount To Fair Value Expected 5-Year Annualized Cash Flow Growth

Valuation-Adjusted Total Return Potential

Colgate-Palmolive (CL) Consumer Staples 2.5% 2.2% 1.8% to 2.9% 12% 5.9% 9.9%
Hormel Foods (HRL) Consumer Staples 1.9% 1.8% 1.2% to 2.8% 8% 7.5% 10.1%
3M (MMM) Industrials 2.8% 2.5% 1.8% to 4.8% 8% 10.0% 13.7%
Federal Realty Investment Trust (FRT) REIT 3.0% 2.8% 2.2% to 6.4% 7% 7.0% 11.0%
Coca-Cola (KO) Consumer Staples 3.5% 3.2% 2.3% to 4.0% 7% 7.2% 11.4%

(Sources: Management guidance, GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, Dividend Yield Theory, Gordon Dividend Growth Model) Note: Margin of error on total return potential is 20%.

My Bear Market Buy List

These are the blue-chips which I expect will generate 13+% total returns at their target yields. Note that all total return estimates are on 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. Stocks at their target yield or better (bolded) are good buys today.

Company Ticker Current Yield Fair Value Yield Target Yield Historical Yield Range Long-Term Expected Cash Flow Growth (Analyst Consensus)

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

Antero Midstream GP (AMGP) 4.7% 2.4% 3.0% 0.1% to 5.7% 20.0% 31%
Mastercard (MA) 0.6% 0.7% 0.7% 0.1% to 0.8% 21.0% 21%
Skyworks Solutions (SWKS) 1.8% 1.2% 2.0% 0.1% to 2.5% 13.5% 21%
Brookfield Asset Management (BAM) 1.4% 1.5% 1.5% 1.1% to 4.2% 18.0% 20%
Lazard (LAZ) 4.8% 2.8% 4.0% 0.8% to 4.8% 12.5% 20%
Visa (V) 0.7% 0.7% 0.7% 0.1% to 0.8% 17.0% 18%
Boeing (BA) 2.0% 2.4% 2.4% 1.4% to 5.4% 15.9% 18%
Energy Transfer LP (uses K-1) (ET) 8.1% 6.4% 7.0% 2.2% to 18.3% 7.9% 18%
Qualcomm (QCOM) 4.8% 3.5% 4.5% 1.0% to 5.0% 9.8% 17%
CVS Health (CVS) 2.9% 1.8% 2.5% 0.6% to 3.3% 11.3% 17%
British American Tobacco (BTI) 6.8% 4.0% 6.0% 2.7% to 8.6% 5.5% 17%
BlackRock (BLK) 3.1% 2.5% 3.0% 1.2% to 3.5% 11.3% 17%
Ameriprise Financial (AMP) 2.8% 2.4% 2.6% 1.1% to 5.0% 11.8% 17%
NextEra Energy Partners (NEP) 4.3% 3.9% 3.9% 0.4% to 5.4% 13.5% 17%
Atlantica Yield (AY) 7.0% 5.9% 6.5% 0.9% to 10.4% 9.0% 17%
Vodafone (VOD) 9.4% 5.7% 8.0% 3.9% to 13.7% 4.7% 17%
Oasis Midstream Partners (uses K-1) (OMP) 9.4% 4.4% 4.4% 2.1% to 11.5% 13.0% 17%
Texas Instruments (TXN) 2.9% 2.5% 2.5% 0.9% to 3.5% 13.8% 16%
MPLX (uses K-1) (MPLX) 7.5% 6.1% 7.0% 0.5% to 9.3% 6.0% 16%
Citigroup (C) 2.8% 2.3% 2.5% 0% to 78.6% 13.1% 16%
Goldman Sachs (GS) 1.6% 1.3% 1.8% 0.7% to 2.6% 12.1% 16%
Philip Morris International (PM) 5.5% 4.5% 6.0% 0.8% to 6.8% 6.8% 16%
Bristol-Myers Squibb (BMY) 3.2% 2.6% 3.0% 2.0% to 7.1% 11.3% 16%
American Tower (AMT) 1.9% 1.9% 1.9% 0.6% to 2.1% 15.1% 16%
Home Bancshares (HOMB) 2.4% 1.5% 2.0% 0.7% to 2.8% 10.2% 15%
TD Ameritrade (AMTD) 2.1% 1.7% 2.0% 0.2 to 2.4% 10.0% 15%
Microsoft (MSFT) 1.7% 2.6% 2.6% 1.1% to 3.1% 12.3% 15%
ONEOK (OKE) 5.1% 5.1% 5.1% 2.4% to 12.8% 10.0% 15%
Essential Properties Realty Trust (EPRT) 5.1% 5.0% 5.0% 1.5% to 6% 10.0% 15%
American Express (AXP) 1.5% 1.5% 2.0% 0.7 to 8.7% 10.0% 15%
Brookfield Infrastructure Partners (uses K-1) (BIP) 5.0% 4.6% 4.6% 3.7% to 8% 10.0% 15%
EQT Midstream Partners (uses K-1) (EQM) 10.5% 4.1% 5.5% 0.9% to 10.7% 7.0% 15%
A.O. Smith (AOS) 1.7% 1.1% 1.6% 0.8% to 3.4% 8.9% 14%
Noble Midstream Partners (uses a K-1) (NBLX) 7.3% 3.9% 3.9% 0.8% to 7.4% 10.3% 14%
QTS Realty Trust (QTS) 3.7% 3.2% 3.2% 0.9% to 4.7% 11.0% 14%
TransCanada (TRP) 4.9% 3.9% 4.5% 3.1% to 5.9% 8.0% 14%
Magellan Midstream Partners (uses K-1) (MMP) 6.8% 4.6% 6.0% 2.7% to 12.0% 5.2% 14%
Apple (AAPL) 1.7% 1.7% 2.0% 0.4% to 2.8% 10.0% 14%
Brookfield Renewable Partners (uses K-1) (BEP) 7.0% 5.7% 6.5% 3.8% to 8.4% 6.5% 14%
TerraForm Power (TERP) 6.2% 5.0% 6.0% 0.5% to 16.3% 6.5% 14%
Iron Mountain (IRM) 7.0% 6.0% 6.0% 0.2% to 8% 7.2% 14%
Bank of America (BAC) 2.1% 1.8% 2.0% 0.2% to 59.1% 10.5% 14%
Equinix (EQIX) 2.3% 2.1% 2.2% 0.6% to 2.5% 10.0% 14%
General Dynamics (GD) 2.1% 1.9% 2.1% 1% to 4.9% 10.5% 14%
Roper Technologies (ROP) 0.6% 0.6% 0.8% 0.3% to 1.0% 10.0% 14%
Synchrony Financial (SYF) 2.7% 1.8% 2.4% 0.4% to 2.9% 8.2% 14%
Illinois Tool Works (ITW) 2.8% 2.2% 2.4% 1.6% to 4.5% 10.0% 13%
Suncor Energy (SU) 3.9% 3.0% 3.1% 0.4% to 4.0% 9.7% 13%
Waste Management (WM) 1.9% 2.6% 2.6% 1.9% to 4.7% 10.7% 13%
EPR Properties (EPR) 6.0% 6.1% 7.3% 4.5% to 24.8% 4.0% 13%
Merck (MRK) 2.8% 3.1% 3.3% 2.4% to 6.7% 9.4% 13%
Brookfield Property REIT (BPR) 6.6% 5.0% 5.0% 1.2% to 8.4% 8.0% 13%
Enterprise Products Partners (uses K-1) (EPD) 6.2% 5.9% 6.0% 3.4% to 11.7% 7.0% 13%
Air Products and Chemicals (APD) 2.7% 2.4% 2.4% 1.7% to 4.1% 12.3% 13%
Jack Henry & Associates (JKHY) 1.2% 1.3% 1.5% 0.9% to 2.1% 10.5% 13%
Dominion Energy (D) 5.0% 3.8% 4.3% 3% to 5.8% 6.7% 13%
Disney (DIS) 1.6% 1.5% 2.0% 0.9% to 2.2% 8.5% 13%
Emerson Electric (EMR) 2.9% 3.2% 3.5% 1.9% to 5% 9.0% 13%
Chevron (CVX) 4.0% 3.9% 4.6% 2.3% to 5.7% 7.0% 13%
Broadcom (AVGO) 3.8% 3.0% 3.0% 0.2% to 4.6% 10.0% 13%
Home Depot (HD) 2.1% 2.1% 2.1% 1.6% to 5% 11.2% 13%
3M (MMM) 2.8% 2.5% 2.7% 1.8% to 4.8% 10.0% 13%
JPMorgan Chase (JPM) 3.0% 2.6% 3.5% 0.4% to 7.6% 6.5% 13%
LeMaitre Vascular (LMAT) 1.1% 1.1% 1.1% 0.3% to 2.0% 12.0% 13%
Lam Research (LRCX) 2.4% 2.4% 3.0% 0.3% to 3.6% 8.0% 13%
Telus Corp. (TU) 4.5% 4.1% 5.0% 3.3% to 6.3% 6.5% 13%
Digital Realty Trust (DLR) 3.5% 3.9% 4.3% 2.5% to 7% 8.0% 13%
LyondellBasell Industries (LYB) 4.6% 3.6% 4.5% 0.2% to 4.9% 6.7% 13%
CyrusOne (CONE) 3.2% 3.3% 3.3% 0.7% to 3.8% 10.0% 13%
Simon Property Group (SPG) 4.5% 3.4% 4.4% 2.4% to 14.6% 6.3% 13%
Crown Castle (CCI) 3.8% 3.9% 4.5% 0.5% to 4.4% 7.5% 13%
W.P. Carey (WPC) 5.5% 6.1% 7.3% 3.4% to 10.9% 4.0% 13%
Welltower (WELL) 4.5% 5.0% 6.5% 3.8% to 10.0% 4.0% 13%
STORE Capital (STOR) 4.1% 4.7% 5.9% 0.5% to 5.7% 5.0% 13%
Realty Income (O) 3.9% 4.6% 5.7% 3.3% to 11.2% 5.3% 13%
Average 3.9% 3.3% 3.7% 9.6% 15%

(Sources: Management guidance, GuruFocus, F.A.S.T. Graphs, Simply Safe Dividends, Dividend Yield Theory, Gordon Dividend Growth Model) Note: Margin of error on total return potential is 20%.

Note that the bolded stocks are all at target yield or better, meaning it's a great time to either add them to your portfolio or add to an existing position

Bottom Line: When Stocks Are Roaring Higher, Undervalued Quality Dividend Growth Stocks Are Your Best Opportunity To Earn Great Future Returns And Income

Don't get me wrong, I'm not saying that you'll earn nearly the kind of future returns that were on offer in December when the S&P 500 plunged into its worst correction in 10 years. But the great thing about the market is that no matter how bullish investors get in general, some industry or sector will always be beaten down.

This weekly watchlist series is all about pointing out the best long-term dividend growth stocks I know of so that you can always have a good place to put your hard-earned money to work.

Every one of these companies is one I'm confident will deliver safe and growing dividends over time, as well as market-beating, double-digit total returns. After all, it's based on the five watchlists that I intend to use to invest all my weekly savings for the rest of my life, so you can be assured that I'm dedicated to ensuring each company's quality and long-term growth prospects, and verify both on a quarterly basis.

Disclosure: I am/we are long ENB, KIM, BPY, BLK, ITW, TXN, AOS, AAPL, ABBV, BEP, MMM, LEG, WBA, EPD, MMP, ET, GS, XOM, MPLX, V, MA, BIP, TERP, IRM, HD, SWKS, PM, OKE, C, AMT, BAM, LRCX, JPM, BAC, AMGP, LYB, BTI, TU, SPG, AMTD, BA, CONE, LOW, BMY, AMP, QTS, AY, EQIX, SWK, EPRT, GD, D., LAZ, QCOM, CVS, VOD, APD, AMP, HOMB, SYF, OMP, NBLX, EQM, SU. 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.