Credit Ratings And Quality Indicators For Dividend Champions, Contenders And Challengers

by: Juan de la Hoz

Dividend growth investors sometimes seek to invest in only the highest-quality stocks.

This article presents the highest-quality dividend growth stocks according to several metrics.

The article also presents an overview and analysis of quality factors for dividend growth stocks.

In this article, I'll be analyzing quality metrics for over 800 dividend growth stocks. I'll present some general results, and include two lists of high-quality dividend growth stocks that might be of interest and use to readers and investors. These stocks all offer strong balance sheets with improving fundamentals, and many are also significantly undervalued relative to their historical and industry average, so they all make for interesting investment opportunities.

Quality Indicators for Dividend Growth Stocks

First, a quick explanation of the dividend growth stocks selected and analyzed. I've compiled information for Dividend Champions, Contenders and Challengers. These are companies with 25, 10, and 5 consecutive years of annual dividend growth, respectively. Stocks have to trade on U.S. exchanges, although companies don't have to be headquartered in the country. Justin Law maintains a very handy spreadsheet of these stocks here.

Dividend growth stocks tend to have relatively high credit ratings, especially those stocks with longer dividend growth streaks. Champions have the best credit profile out of all three groups, most are investment-grade, and they have an average rating of A. Contenders have a similar credit profile, most are investment-grade, although the average rating is only BBB. Challengers are also mostly investment-grade, with an average rating of BBB, but a very sizable proportion of these companies have more speculative ratings. No company is rated lower than B in any of the three groups.

The following table breakdowns S&P credit ratings for Champions, Contenders, and Challengers:

(Source: Chart by author - Bloomberg)

I imagine many readers and investors are attracted to dividend growth stocks, especially Dividend Champions, due to their perceived high quality and low risk, and this little exercise seems to validate this point of view.

Credit ratings are also a strong predictor of dividend yields. Stocks with high credit ratings tend to trade at premium valuations and carry comparatively low yields, while stocks with lower ratings have substantially higher yields as investors demand greater returns in exchange for higher perceived risks. Stocks rated B carry abnormally high dividend yields, 6.1% on average, but this is due to the presence of two outliers with double-digit yields: New Media Investment Group (NEWM) and Vector Group (VGR).

(Source: Chart by author - Bloomberg)

Besides credit ratings, I also decided to take a look at another quality metric, the Piotroski F-score. This metric was developed by Stanford accounting professor Joseph Piotroski to accurately measure a company's financial position, and takes into consideration the following:

  • ROA
  • Cash from operations
  • Accruals
  • Change in ROA
  • Change in leverage
  • Change in current ratio
  • Change in shares outstanding
  • Change in gross margin
  • Change in asset turnover ratio

Companies are scored in each of the nine metrics above, and the score itself goes from 0 (lowest) to 9 (highest). The Piotroski score puts a heavy emphasis on change, companies can get a reasonably good score if their financial situation is somewhat poor, but rapidly improving. Credit ratings tend to do the opposite, so I thought the two metrics would complement each other quite well.

The two figures are generally somewhat correlated, as companies with higher credit ratings receive greater Piotroski scores:

(Source: Chart by author - Bloomberg)

Finally, I'm presenting a list of the highest-quality stocks according to the two metrics selected. I've decided to include companies with a minimum credit rating of A-, and a minimum Piotroski F-score of 7. Companies with these scores have very strong balance sheets and have seen their financial situation markedly improve during the past year. Stocks in the list are ranked according to their S&P credit rating.

(Source: Chart by author - Bloomberg)

Undervalued Quality Dividend Growth Stocks

I had previously done an in-depth quantitative value analysis of these same stocks and presented a very similar list to the one above but from a value perspective. I thought it might be interesting for readers and investors to combine the two approaches and arrive at a composite list of undervalued high-quality dividend growth stocks:

(Source: Chart by author - Bloomberg)


Dividend Champions, Contenders and Challengers generally offer investors good yields and outstanding dividend growth. I've presented two lists of high-quality dividend growth stocks which, I believe, are particularly strong, low-risk investment opportunities. Interested readers and investors should take a closer look at a company before investing but, hopefully, these lists served as a good starting point.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.