Undervalued Dividend Growth Stocks: March 2019

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.
• This month I have added a new criterion, the dividend safety score.

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 fourth quarter of 2018 can be found here: 4th quarter 2018 update.

Up until a few months ago, I have only shown the stocks I decided to purchase. But recently I 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.
• A dividend safety rating of 60 or more from SimplysafeDividends.com.

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.
• Dividend Safety Score of 61 or more from Simplysafedividends.com.

The safety rating of 61 or above is a new criterion I added last month. To make the cut all the stocks must have a score of 61 or above from “Simply Safe Dividends."

The time it takes to run this screen is only about 2 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.

Prudential Financial (PRU)

Eaton Vance (EV)

These two stocks show a steady uptrend in earnings (the blue and orange lines), and the price (the black line) has dropped below these lines, indicating that the stock is undervalued.

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

March Passing Stocks

Company	Ticker			Div.	EPS%	Chowder	No.	SSD
Name	Symbol	Sector	Industry	Yield	Payout	Rule	Yrs	Rating
Assurant Inc.	AIZ	Financials	Insurance	2.33	58.25	21.2	15	61
Amgen Inc.	AMGN	Health Care	Biotechnology	3.05	46.03	26.0	9	87
Ameriprise Financial Inc.	AMP	Financials	Capital Markets	2.73	25.35	14.7	14	92
TD Ameritrade Holding Corp.	AMTD	Financials	Capital Markets	2.13	38.34	21.1	9	92
BB&T Corp.	BBT	Financials	Banks	3.18	41.43	13.7	8	74
Best Buy Corp.	BBY	Consumer Discretionary	Specialty Retail	2.61	37.82	24.1	15	78
BlackRock Inc.	BLK	Financials	Capital Markets	2.98	49.59	15.3	10	95
Comcast Corp.	CMCSA	Communication Services	Media	2.17	33.20	16.4	12	86
Discover Financial Services	DFS	Financials	Consumer Finance	2.23	20.51	17.4	8	72
Eastman Chemical Co.	EMN	Materials	Chemicals	3.00	33.56	16.3	9	75
Eaton Corp. plc	ETN	Industrials	Electrical Equipment	3.31	53.77	12.8	9	87
Eaton Vance Corp.	EV	Financials	Capital Markets	3.35	42.30	12.7	38	85
Hubbell Inc.	HUBB	Industrials	Electrical Equipment	2.85	52.26	14.1	11	88
JPMorgan Chase & Co.	JPM	Financials	Banks	3.07	35.60	15.8	8	73
Lockheed Martin	LMT	Industrials	Aerospace & Defense	2.84	50.46	14.2	16	82
Lincoln National Corp.	LNC	Financials	Insurance	2.37	20.00	24.8	9	82
Magna International Inc.	MGA	Consumer Discretionary	Auto Components	2.77	21.82	18.3	9	78
NetApp Inc.	NTAP	Information Technology	Technology Hardware, Storage & Peripherals	2.45	41.45	34.4	6	93
Omnicom Group Inc.	OMC	Communication Services	Media	3.43	43.62	13.3	10	90
Principal Financial Group Inc.	PFG	Financials	Insurance	4.10	40.37	20.6	10	78
PNC Financial Services Group Inc.	PNC	Financials	Banks	3.02	35.38	17.6	8	77
Prudential Financial Inc.	PRU	Financials	Insurance	4.17	43.81	20.0	11	61
Snap-on Inc.	SNA	Industrials	Machinery	2.38	31.83	19.0	9	99
State Street Corp.	STT	Financials	Capital Markets	2.62	29.33	14.4	8	74
Target Corp.	TGT	Consumer Discretionary	Multiline Retail	3.52	49.14	13.3	51	74
Tyson Foods Inc.	TSN	Consumer Staples	Food Products	2.43	29.76	43.9	7	98
Unum Group	UNM	Financials	Insurance	2.78	43.88	15.0	10	61

Click to enlarge

High Yield Stocks

Company	Ticker			Div.	Chowder	DGR	DGR	DGR	DGR	SSD
Name	Symbol	Sector	Industry	Yield	Rule	1-yr	3-yr	5-yr	10-yr	Rating
Simon Property Group Inc.	SPG	Real Estate	Equity Real Estate Investment Trusts (REITs)	4.53	17.1	10.5	9.3	12.6	8.8	72

Click to enlarge

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 which 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 PRU. 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.