In my monthly series of 10 Dividend Growth Stocks, I rank a subset of Dividend Radar's list of dividend growth (DG) stocks. Dividend Radar is a weekly automatically generated spreadsheet listing stocks with dividend increase streaks of five years or more.
The latest Dividend Radar list (dated May 22, 2020) contains 774 stocks.
I decided to screen for DG stocks with quality scores in the range 23-25 that are trading below my fair value estimates. Furthermore, I considered only stocks likely to generate annualized total returns of at least 8%, according to the Chowder Rule. These are pretty stringent screens, and only eleven DG stocks in Dividend Radar qualify.
Ranking by Quality
I use the scoring system of DVK Quality Snapshots to obtain quality scores, and consider the following factors as tie-breakers:
Each stock's Rank is shown in the tables that follow.
Fair Value Estimates
To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox.io. Additionally, I estimate fair value using the five-year average dividend yield of each stock using data from Simply Safe Dividends.
With several 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.
The so-called Chowder Number is a popular metric for screening DG stocks for possible investment. The metric favors DG stocks likely to produce annualized returns of 8%. Essentially, you add the current dividend yield and the five-year annual dividend growth rate to obtain the CDN.
Chowder used 8 as a minimum number for utilities yielding at least 4%, 12 for stocks yielding at least 3%, and 15 for stocks yielding less than 3%. I call such CDNs favorable, as they are more likely to deliver annualized returns of at least 8%.
Here are this month's top 10 DG in rank order:
Top 10 Dividend Growth Stocks for April 2020
I happen to own all ten of this month's DG stocks in my DivGro portfolio.
1. Automatic Data Processing, Inc. (ADP) - Information Technology
ADP provides technology-enabled human capital management solutions and business process outsourcing solutions. These offerings include payroll services, benefits administration, talent management, HR management, time and attendance management, insurance services, retirement services, and tax and compliance services. ADP was founded in 1949 and is headquartered in Roseland, New Jersey.
2. Honeywell International Inc. (HON) - Industrials
HON is a diversified technology and manufacturing company with worldwide operations. The company provides aerospace products, software, and services; control, sensing and security technologies; materials, process technologies, and automation solutions; and productivity, workplace safety, and asset performance solutions. HON was founded in 1920 and is based in Morris Township, New Jersey.
3. Medtronic plc (MDT) – Health Care
MDT manufactures and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. The company operates in four segments: Cardiac and Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group, and Diabetes Group. MDT was founded in 1949 and is headquartered in Dublin, Ireland.
4. PepsiCo, Inc. (PEP) - Consumer Staples
PEP is a global beverage and food company. The company distributes beverages under well-known brands such as Pepsi, Gatorade, Mountain Dew, 7UP, and Tropicana, and food and snacks under brands such as Quaker, Lay’s, Doritos, Cheetos, and Ruffles. PEP was founded in 1898 and is headquartered in Purchase, New York.
5. Cisco Systems, Inc. (CSCO) - Information Technology
CSCO designs, manufactures, and sells Internet protocol-based products and services. The company also delivers integrated solutions to develop and connect networks around the world. CSCO serves businesses of various sizes, public institutions, governments, and communications service providers. The company was founded in 1984 and is headquartered in San Jose, California.
6. Texas Instruments Incorporated (TXN) - Information Technology
TXN designs, manufactures and sells semiconductors to electronics designers and manufacturers globally. The company operates through two segments: Analog and Embedded Processing. It markets and sells semiconductor products through a direct sales force and through distributors, as well as online. TXN was founded in 1930 and is headquartered in Dallas, Texas.
7. Union Pacific Corporation (UNP) - Industrials
Omaha, Nebraska-based UNP operates the largest public railroad in North America, with 32,000 miles of track linking 23 states in the western two-thirds of the United States. UNP hauls coal, industrial products, intermodal containers, agricultural goods, chemicals, and automotive products. UNP owns a quarter of Mexican railroad Ferromex. The company was founded in 1862.
8. UnitedHealth Group Incorporated (UNH) - Health Care
Founded in 1974 and based in Minnetonka, Minnesota, UNH is a diversified health and well-being company with core capabilities in clinical expertise, advanced technology, and data and health information. UNH provides medical benefits to customers in the United States and in more than 125 other countries.
9. Comcast Corporation (CMCSA) - Communication Services
Founded in 1963 and headquartered in Philadelphia, Pennsylvania, CMCSA is a media and technology company. The company's Comcast Cable business provides video, Internet, and voice services to residential customers under the Xfinity brand. CMCSA’s NBC Universal business consists of cable networks, broadcast television, filmed entertainment, and theme parks.
10. 3M Company (MMM) - Industrials
MMM is a diversified technology company with worldwide operations. It has leading positions in the consumer and office, display and graphics, electronics and telecommunications, health care, industrial, safety, security and protection services, transportation, and other businesses. MMM was founded in 1902 and is headquartered in St. Paul, Minnesota.
Please note that the top 10 DG stocks are candidates for further analysis, not recommendations.
Below, I provide a table with key metrics of interest to DG investors, including the dividend increase streak (Yrs), the dividend Yield for a recent stock Price, and the 5-year dividend growth rate (5-Yr DGR), as well as the Chowder Number (CDN).
I also provide the 5 quality indicators used in determining each stock's quality score (Qual), as well as 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 a recent price to my fair value estimate.
Since only eleven DG stocks qualified, I decided to include #11 in the table as well, Amgen Inc. (AMGN).
An equal-weighted portfolio of the top 10 DG stocks would have returned 60% over the last 5 years, compared with 44% returned by the S&P 500 over the same period. Of the 10 stocks, CSCO, UNP, and UNH were the top-performing stocks over the last 30 days.
CMCSA is discounted most, MMM offers the highest yield, and UNH provides the most favorable CDN. ADP is one of only seven DG stocks with a perfect dividend quality score.
I own essentially full-size positions in each of the top 10 DG stocks, except for PEP. In order to turn PEP into a full-size position, I would have to add about 50 shares.
PEP is a Dividend Champion with a 48-year dividend increase streak and steady dividend growth:
I'm thinking about adding shares to my existing position. PEP trades ex-dividend on Thursday, June 4, so I'll need to buy shares before then to earn the next dividend.
In this article, I ranked high-quality stocks in the Dividend Radar list of DG stocks. I considered only DG stocks with quality scores in the range 23-25 and trading at a discount to fair value. I also screened for stocks with a higher likelihood of delivering annualized returns of at least 8%, according to the Chowder rule.
I own all the stocks in this month's top 10, and I'm considering turning my PEP position into a full position by adding around 50 shares.
Thanks for reading and take care, everybody!
This article was written by
Disclosure: I am/we are long ADP, AMGN, CMCSA, CSCO, HON, MDT, MMM, PEP, TXN, UNH, UNP. 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.