The Dividend Aristocrats Ranked By Quality Score

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Includes: ABBV, ADM, ADP, AFL, APD, BEN, CAT, CB, CL, CTAS, EMR, GD, GWW, HRL, ITW, JNJ, KO, LOW, MCD, PBCT, PEP, PG, SHW, SWK, T, TROW, UTX, WBA, WMT, XOM
by: FerdiS
Summary

Dividend Aristocrats are S&P 500 stocks that have increased their dividend payouts for 25 consecutive years or more.

Using a slightly modified version of David Van Knapp's quality scoring system, I rank all the Dividend Aristocrats.

The article includes tables listing quality indicators, key metrics, and fair value estimates and encourages dividend growth investors to consider high-quality candidates trading below fair value.

David Van Knapp presented a simple and seemingly effective quality scoring system in this article on high-quality, high-yield dividend growth stocks.

The system employs five widely used quality indicators from independent sources and assigns 0-5 points to each quality indicator, for a maximum of 25 points.

In recent articles on the top holdings of dividend ETFs (here and here), I included quality scores along with key metrics of interest to dividend growth investors, including dividend yield and dividend growth rate.

Here, I'm using a slightly modified version of the quality scoring system to rank an elite group of stocks called the Dividend Aristocrats.

Dividend Aristocrats

Dividend Aristocrats are S&P 500 stocks that have increased their dividend payouts for 25 consecutive years or more.

In January, the Dividend Aristocrats expanded to 57 stocks with the addition of Chubb (CB), Caterpillar (CAT), People’s United Financial (PBCT), and United Technologies (UTX).

The Dividend Aristocrats are high-quality stocks of companies with strong and durable competitive advantages. On top of that, these companies have the desire and ability to pay shareholders increasingly higher dividends year after year.

The Dividend Aristocrats have outperformed the S&P 500 handily over the past 10 years:

Source: S&P Global

Please see this report for more details on the Dividend Aristocrats.

Quality Scores

Before presenting my ranking of Dividend Aristocrats, here is a brief summary of David Van Knapp's quality scoring system and my modifications.

As mentioned earlier, the system employs five quality indicators and assigns 0-5 points to each quality indicator, for a maximum of 25 points.

The first quality indicator is Value Line's Safety Rank, which measures the total risk of a stock relative to approximately 1,700 other stocks covered by Value Line. The safest stocks are assigned a rank of 1, whereas the riskiest stocks are assigned a rank of 5.

Value Line also provides Financial Strength ratings, from A++ to C in nine steps. The lowest rating is reserved for companies in serious financial difficulty. Factors considered in assigning ratings include balance sheet strength, corporate performance, market capitalization, and stability of returns.

The next quality indicator is Morningstar's Economic Moat, a proprietary data point that reflects the strength and sustainability of a company's competitive advantage. A wide-moat company is positioned to sustain economic profits for at least 20 years, whereas a narrow moat company can do so for at least 10 years.

Standards & Poor's (S&P) provides credit ratings to help investors determine investment risks and also calculates more than one million stock market indices, including the well-known S&P 500. Ratings are either investment grade (AAA through BBB–) or speculative (BB+ through D).

The final quality indicator is the Dividend Safety Scores provided by Simply Safe Dividends. Scores range from 0 to 100 and are based on more than a dozen fundamental metrics that influence the ability of companies to continue paying dividends:

Here is the scoring system used, a slightly modified version of the one presented by David Van Knapp:

Modified version of David Van Knapp's quality scoring system.

My modifications include assigning 3 points to companies that don't have an S&P Credit Rating but carry no debt. Also, I award points for Dividend Safety Scores matching the colored ranges above (which may have been David's intent but was not so presented in the linked article).

Below, I'm presenting all the Dividend Aristocrats ranked by quality score, defined as the sum of points assigned per quality indicator. With five quality factors and a maximum score of 5 points per quality indicator, the maximum score is 25.

I use a similar color coding scheme than in the original article, though I differentiate perfect scores:

Finally, in order to rank stocks I needed a way to break ties, so I consider the following in turn:

  • Dividend Safety Score
  • S&P Credit Rating
  • Dividend Yield

For example, Johnson & Johnson (JNJ) and Procter & Gamble (PG) both have quality scores of 25. To break the tie, first I consider their dividend safety scores. Both have Very Safe scores of 99, so the next tie-breaker is used: the S&P Credit Rating. Here JNJ wins out because it is one of only two stocks with an AAA credit rating.

Key Metrics and Fair Value Estimates

In addition to quality indicators and quality scores, I provide columns with key metrics of interest to dividend growth investors, including years of consecutive dividend increases (Yrs), dividend Yield for a recent Price, and five-year compound annual dividend growth rate (5-Yr DGR).

Furthermore, I provide a fair value estimate (Fair Val.) to help identify stocks that trade at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of the recent price to the fair value estimate.

To estimate fair value, I reference fair value estimates and price targets from several sources:

  • Morningstar: Fair value estimate based on discounted cash flow analysis
  • Finbox.io: Fair value estimate based on several financial models
  • Finbox.io: Average of analyst targets
  • Value Line: Average of target range

Additionally, I estimate fair value using the five-year average dividend yield of each stock using data from Simply Safe Dividends:

Fair value estimate = recent price × dividend yield ÷ 5-year average dividend yield

With five estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.

Dividend Aristocrats with Perfect Quality Scores

The top-ranked stocks are JNJ, PG, and Automatic Data Processing (ADP), all earning perfect scores of 25.

These are great stocks and the market values them highly, with only JNJ trading below fair value. I own all three stocks in my DivGro portfolio although my ADP holding is quite small at only 0.2% of portfolio value. I'm hoping to increase my ADP position, but only if the price drops to below $150 per share.

Dividend Aristocrats with a Quality Score of 24

The stocks in the second group missed a perfect score on only one of the quality indicators.

I own all but two of these stocks, Colgate-Palmolive (CL) and Walmart (WMT).

I used to own WMT but closed my position in January 2019. The stock's five-year dividend growth rate has declined to below 3% per year and the low dividend yield just does not provide enough compensation for such a low dividend growth rate.

CL is trading at about fair value and I would consider opening a position below $65 per share. In fact, on Friday I sold two $65 put options on CL and collected $247 of options income. Should the options be exercised on or before 15 November 2019, I'll buy 200 shares of CL at an effective cost basis of $63.77 per share.

At only 0.32% of portfolio value, PepsiCo (PEP) is another small position in my portfolio. Unfortunately, the stock is trading above fair value and I'll need to wait for a better entry point, perhaps below $120 per share.

The other stocks all are trading below fair value, with Exxon Mobil (XOM) providing the largest discount and the juiciest yield. My XOM position is 0.94% of portfolio value, which leaves some room for adding shares as my average position size is about 1.2% of portfolio value.

General Dynamics (GD) looks interesting too, offering a decent yield and a five-year dividend growth rate in the double digits. My GD position is 1.11% of portfolio value, so I could add a few more shares.

Dividend Aristocrats with a Quality Score of 23

The next group of stocks missed on up to two quality indicators.

I own three of these stocks, Air Products and Chemicals (APD), Illinois Tool Works (ITW), and Coca-Cola (KO). Only my KO position is full-sized.

I'd love to add to my APD position, but only below the fair value estimate of $194 per share. ITW is trading at a small discount, providing an opportunity to increase my position.

UTX and Emerson Electric (EMR) both offer great value. Instead of opening positions, though, I decided to sell put options and collect options income. For UTX, I sold one $115 put option expiring in November, collecting $221, and for EMR, I sold two $60 put options expiring in December, collecting $374. Should these options be exercised, I'll buy UTX for $112.79 per share and EMR for $58.13 per share.

Dividend Aristocrats with a Quality Score of 22

This group of stocks fell short on up to three quality indicators.

I own only three of these stocks, CB, T. Rowe Price (TROW), and McDonald's (MCD).

Notice that TROW does not have an S&P Credit Rating, but the company has no debt and so I give it 3 points instead of penalizing it with 0 points for the NA in the S&P Credit Rating column.

Both CB and MCD are trading above fair value and TROW is one of my larger positions (2.68% of portfolio value), so I'm not interested in adding to any of these positions.

Of the stocks I don't own, Franklin Resources (BEN) looks interesting with a discount of 11% to fair value and a rather impressive five-year dividend growth rate of about 19%. Again, rather than open a position I decided to sell three $30 put options expiring in January 2020, collecting $261 in the process. Should these options be exercised, I'll buy shares of BEN at an effective cost basis of $29.13 per share.

W.W. Grainger (GWW) and CAT are trading below fair value, too, but are too pricey for options trades. Until I can spare some cash for outright buys, these candidates will have to linger on my watch list.

Dividend Aristocrats with a Quality Score of 21

The next group of stocks missed on up to four quality indicators.

I own two of these stocks, Aflac (AFL) and Lowe's (LOW).

AFL is one of my home run stocks, a designation I give to any stock in my portfolio that crosses the 100% mark in total returns. I wouldn't mind increasing my AFL position, which remains relatively small at 0.67% of portfolio value despite its home run status. But the stock is trading at a premium of 10% to fair value, so now wouldn't be the time to add to my position.

I have some room to add to my LOW position, too, though I'd like to see the price below $98 per share. LOW's five-year dividend growth rate is impressive, though its yield is a bit low

None of the stocks I don't own interest me at this time.

Dividend Aristocrats with a Quality Score of 20

Stocks in this group fall short on up to five quality indicators.

I own three of the five stocks in this group, Hormel Foods (HRL), Stanley Black & Decker (SWK), and AT&T (T). The only stock trading at a reasonable discount is T, but it is one of my larger positions already (2.46% of portfolio value).

I'm not interested in Cintas (CTAS) or Sherwin-Williams (SHW) at this time. Their yields are just not compelling enough despite some strong dividend growth over the last five years.

Dividend Aristocrats with Quality Scores below 20

The final group of 18 stocks has quality scores below 20.

I own three of these stocks, Walgreens Boots Alliance (WBA), AbbVie (ABBV), and Archer-Daniels-Midland (ADM). My WBA and ABBV positions are above average size already, so the only position I'll consider adding to is ADM. With ADM trading about 17% below fair value, it seems to be an opportune time to add shares.

There are more than enough candidates with higher quality scores, so I'm not interested in any other stocks in this group.

Concluding Remarks

I love the simplicity of David Van Knapp's quality scoring system, and I believe it does a remarkable job of identifying high-quality stocks. The quality scoring system is quite stringent, so stocks scoring 20-25 points would be considered high-quality stocks by many investors.

In this article, I used a slightly modified version of David Van Knapp's system to rank the Dividend Aristocrats, an elite group of S&P 500 stocks that have increased their dividend payouts for 25 consecutive years or more.

Of the 57 Dividend Aristocrats, no fewer than 39 have quality scores in the 20-25 range, and only three stocks of the remaining stocks have quality scores below 15 points. These truly are high-quality stocks!

Hopefully, the article will give dividend growth investors a good starting point for stock selection and further research. I've highlighted some stocks I find worthy of further consideration, especially those trading below fair value. As always, though, I encourage you to do your own due diligence before investing.

Thanks for reading and happy investing!

Download a spreadsheet of the data in this article: aristocrats-jul19.xlsx

Disclosure: I am/we are long ABBV, ADM, ADP, AFL, APD, CB, CVX, GD, HRL, ITW, JNJ, KO, LOW, MCD, MDT, MMM, PEP, PG, SWK, T, TROW, XOM. 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.