In a recent article, I ranked the Dividend Aristocrats using a modified version of David Van Knapp's quality scoring system. 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.
While there are exceptions, the highest quality Dividend Aristocrats are low-yielding stocks with yields less than 3%. In this article, I'm presenting high-quality dividend growth (DG) stocks yielding at least 3%. Note that David Van Knapp's original article presented high-quality DG stocks yielding 4% or more.
There are more than 300 DG stocks with yields of at least 3% in the Dividend Champions spreadsheet (CCC). I ranked 297 of these and present the 85 highest ranked DG stocks here, those with quality scores of 15 or higher.
Quality Scoring System
As mentioned earlier, the quality scoring system employs five quality indicators and assigns 0-5 points to each quality indicator, for a maximum of 25 points:
- Value Line's Safety Rank
- Value Line's Financial Strength ratings
- Morningstar's Economic Moat
- Standards & Poor's (S&P) credit ratings
- Simply Safe Dividends' Dividend Safety Scores
Here is the scoring system:
The 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. In order to rank DG stocks, I break ties by considering the following factors, in turn:
- Dividend Safety Score
- S&P Credit Rating
- Dividend Yield
Finally, I use a similar color coding scheme than in the original article, though I differentiate perfect scores:
Key Metrics and Fair Value Estimates
In addition to quality indicators and quality scores, I provide columns with key metrics of interest to DG 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.
DG Stocks with Quality Scores of 20-24
There is not a single DG stock yielding 3% or more that earned a perfect quality score of 25. Generally, the highest quality DG stocks offer lower yields as the market recognizes and "awards" high-quality stocks.
However, there are four DG stocks with quality scores of 24, and altogether 21 DG stocks with quality scores of 20-24:
I own 12 of these stocks in my DivGro portfolio, as highlighted in the Ticker column. Dividend Aristocrats are highlighted in the Yrs column.
With a yield of 6.06%, AT&T (T) is the highest-yielding, high-quality DG stock. T already occupies a relatively large position in my portfolio (2.42% of portfolio value), so I'm not looking to add more T shares at this time. Besides, I prefer to invest in stocks when they're discounted by at least 10%.
Four stocks yield more than 4%:
- Exxon Mobil (XOM), yielding 4.48%
- Verizon Communications (VZ), yielding 4.21%
- International Business Machines (IBM), yielding 4.54%
- Kellogg (K), yielding 4.11%
Of these, only XOM and K are discounted by at least 10%. Given an average position size of about 1.2% of portfolio value, my XOM position at 0.93% leaves some room for adding shares. As for K, the stock is trading about 27% below its 52-week high, while its dividend yield is at its highest level in 19 years. K's debt is somewhat high, though, so I don't feel comfortable opening a position at this time.
I'm somewhat surprised to see how many of these high-quality stocks are trading at discounted valuations. To help filter candidates for further analysis, I sometimes apply the so-called Chowder Dividend Rule (CDR), which prefers DG stocks offering a combined yield and five-year DGR of at least 12%. Another interesting metric to consider is earnings yield, the inverse of the P/E ratio.
The following table presents stocks discounted by at least 10% and sorted by the CDR metric:
So, AMGN and MMM pass the CDR, while GILD and WFC offer attractive earnings yields.
AMGN is one of the more profitable biotechs in the industry and the company offers an attractive and fast-growing dividend. Investors willing to invest in the rather volatile biotech industry should receive some good compensation for the associated risk. My AMGN position is equivalent to 1.26% of portfolio value (just above the average of 1.2%), so I'm not looking to add more shares at this time.
My MMM position is 1.25% of portfolio value, so again, I'm not looking to add more shares at this time. The stock is suffering from growth concerns following very disappointing earnings and much lower guidance. While MMM's stellar balance sheet and strong competitive advantages remain attractive, the company will need to prove that it can return to a reasonable long-term growth rate.
GILD only recently made the CCC list of DG stocks. As a biotech stock operating in a volatile arena, the stock faces several challenges. These include the highly regulated and expensive nature of drug development, a political environment critical of elevated drug prices, and loss of revenue due to expiring drug patents. My GILD position is a larger-than-average 1.59%, so I'm not interested in adding to my position.
Finally, WFC has struggled to grow revenue since its account fraud scandal, as many investors placed the stock in the penalty box. I did so myself, selling my original position in December 2016 to secure an annualized net gain of 40%. After CEO Tim Sloan announced his retirement earlier this year, I decided to reinvest in WFC. My new position is small at just 0.31% of portfolio value, so I have ample room to add shares. And it seems to be a good time to do so.
DG Stocks with Quality Scores of 15-19
The stocks in the second quality category (light green) also are high-quality stocks, though I consider them to be "supporting actors". There are 65 DG stocks in this category.
Quality Scores of 17-19
To simplify the presentation, first, consider those with quality scores of 17-19:
I own 10 of the DG stocks with quality scores of 17-19, as highlighted in the Ticker column. As before, Dividend Aristocrats are highlighted in the Yrs column.
Four stocks in this group yield more than 6%:
- Altria (MO) yielding 6.46%
- Magellan Midstream Partners (MMP) yielding 6.10%
- AbbVie (ABBV) yielding 6.09%
- WPP (NYSE:WPP), yielding 6.53%
Of these high yielders, I own MO and ABBV. My MO position at 1.19% is right at the average position size for my portfolio, whereas my ABBV is somewhat larger at 1.68%. As such, I'm not looking to add more shares at this time.
With declining cigarette volumes and increasing regulatory risk, MO's future prospects seem to be diminishing and the stock no longer is considered to be a conservative investment. But MO will become a Dividend King this year with 50 consecutive years of higher dividend payments and the high yield is quite attractive.
ABBV is down 30% from its 52-week high and offers a good opportunity for investors, in my view. ABBV's acquisition of Allergan (AGN) will likely inhibit upside potential in the short term, but the stock will be a better DG stock in the long term.
For various reasons I no longer invest in master limited partnerships, so I'm not interested in owning MMP. As for WPP, the stock's dividend is deemed Unsafe by Simply Safe Dividends. While WPP's yield is attractive, I try to avoid stocks with Dividend Safety Scores below 61:
Four stocks with quality scores of 17-19 yield more than 5%:
- Simon Property (SPG), yielding 5.05%
- Philip Morris International (PM), yielding 5.57%
- Enterprise Products Partners (EPD), yielding 5.72%
- PPL (PPL), yielding 5.45%
I own 40 shares of SPG, which is a position size of 0.78% of portfolio value. And since SPG is trading about 17% below fair value, it looks like a good candidate for adding shares. SPG is one of only two REITs with an A credit rating from S&P and the stock is a high-quality, blue-chip REIT. I'm thinking about increasing my SPG position, which would lower my average cost basis a bit.
PM is trading about 12% below its 52-week high and is discounted by about 17%. My PM position is about 0.98% of portfolio value, leaving some room to add more shares. PM's core business is not exposed to the tricky U.S. market, while PM's next-generation product IQOS seems to be doing quite well. PM's dividend is Safe and the yield is impressive.
EPD is a master limited partnership, which I'm not interested in owning. EPD's yield is solid and the stock is considered a buy by several Seeking Alpha authors (here and here). Simply Safe Dividends give EPD a Very Safe Dividend Safety Score of 89. The stock is trading at a discount of about 7% to my fair value estimate.
Finally, while PPL is trading at a discount of only about 5%, the stock is trading at a significant discount to its peers in the Utility sector. The dividend is deemed Safe by Simply Safe Dividends and management affirmed the utility's 5-6% annual EPS growth target through 2020 in a recent investor's presentation.
Quality Scores of 15-16
Rounding out the stocks in the second quality category, here are those with quality scores of 15-16:
I own only two of the DG stocks with quality scores of 15-16, Realty Income (O) and Broadcom (NASDAQ:AVGO). AVGO is trading at a discount to fair value, but my position already is right at the average size of portfolio value, so I'm not really looking to add shares at this time.
Three stocks in this group yield more than 6%:
- Invesco (IVZ), yielding 5.97%
- EQM Midstream Partners (NYSE:EQM), yielding 10.68%
- Phillips 66 Partners (PSXP), yielding 6.60%
Simply Safe Dividends considers asset manager IVZ's dividend to be Borderline Safe, so I'm not interested in this stock despite its attractive yield. The stock is trading about 27% below its 52-week high, as investors are concerned about IVZ's ability to retain customers in the face of growing passive mutual funds and ETFs with lower expense ratios.
EQM is the highest-yielding DG stock with an impressive yield of 10.68%. While that is a very attractive yield, I no longer invest in master limited partnerships and, even if I did, I'm not sure EQM has the right risk profile for me. For risk-tolerant investors, investing now might be opportune, as EQM is trading at 1.8 price-to-book value and expectations of revenue (and distribution) growth seem to be high.
Finally, PSXP has an attractive yield and is growing its dividend at quite a pace. The company is performing well in a challenged industry and should be able to extend its dividend increase streak of 21 years, though Simply Safe Dividends gives the dividend a Borderline Safe Dividend Safety Score.
A single stocks in this group yields more than 5%:
- Enbridge (ENB), yielding 6.16%
ENB is a large energy firm based in Canada. Shares of ENB have slumped as delays threaten the company's Line 3 Replacement Project, which was expected to account for about 50% of Enbridge's growth spending over the next few years. While ENB's dividend yield is attractive, I'm not comfortable with the risk profile of this investment.
For this article, I used a slightly modified version of David Van Knapp's quality scoring system to rank 297 dividend growth stocks in the CCC list with yields of at least 3%.
I presented the 21 highest ranked stocks with quality scores of 20-24, as well as a second group of 65 stocks with quality scores of 15-19. I consider the second group to be "supporting actors" to the highest quality stocks in the first group.
I'm considering adding shares to my existing positions in WFC, SPG, and PM.
I love the simplicity of David Van Knapp's quality scoring system, which does a remarkable job of identifying high-quality stocks. I hope dividend growth investors looking for high-quality dividend growth stocks with higher yields will find this article valuable.
As always, I encourage readers to do their own due diligence before investing in any of these stocks.
Thanks for reading and happy investing!
Disclosure: I am/we are long XOM, CVX, PFE, MMM, KO, AMGN, VZ, IBM, UPS, GILD, WFC, T, WBA, SPG, PM, D, MO, VLO, QCOM, ADM, DLR, ABBV, O, AVGO. 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.