10 Dividend Growth Stocks For June 2020

Jun. 29, 2020 9:00 AM ETBMY, BMYMP, CAT, EMR, GD, MMM, MRK, PEG, PEP, PFE, PNW53 Comments
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FerdiS
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Summary

  • I rank a selection of dividend growth stocks in Dividend Radar and present the 10 top-ranked stocks for consideration.
  • To rank stocks, I use DVK Quality Snapshots to obtain quality scores and break ties by considering additional metrics.
  • This month, I'm presenting stocks yielding at least 3% that are trading below fair value.

In my monthly series of 10 Dividend Growth Stocks, I rank a selection of dividend growth [DG] stocks in Dividend Radar and present the 10 top-ranked stocks for consideration. Dividend Radar a weekly automatically generated spreadsheet listing stocks with dividend increase streaks of five years or more.

This month I decided to rank high-yielding DG stocks with yields of at least 3% that also trade at discounted valuations. I use DVK Quality Snapshots to assess the quality of DG stocks and break ties in quality scores by considering additional metrics.

Screening and Ranking

The latest Dividend Radar list (dated June 26, 2020) contains 768 stocks.

I decided to screen for DG stocks with yields of at least 3%. Additionally, I wanted to only consider stocks that are trading below my fair value estimates. No fewer than 143 stocks pass these two screens.

Ranking by Quality

I use the scoring system of DVK Quality Snapshots to obtain quality scores, and consider the following factors to break ties in order to rank the stocks:

  • SSD Dividend Safety Scores
  • S&P Credit Ratings
  • Dividend Yield

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 Finbox and Morningstar. I also 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.

Top 10 High-Yielding, Discounted Stocks

Here are this month's top 10 DG stocks in rank order:

Top 10 Dividend Growth Stocks for June 2020

Created by the author based on the ranking in this article.

Last Month's top 10: May Edition of 10 Dividend Growth Stocks

I own six of this month's top 10 DG stocks in my DivGro portfolio.

1. Merck (MRK) Healthcare

MRK is a global healthcare company. Known as MSD outside the United States and Canada, MRK offers health solutions through prescription medicines, vaccines, biologic therapies, and animal health products. The company markets to drug wholesalers and retailers, hospitals, government entities and agencies, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers. MRK was founded in 1891 and is headquartered in Kenilworth, New Jersey.

2. General Dynamics (GD) Industrials

Headquartered in Falls Church, Virginia, GD is an aerospace and defense company offering products and services in business aviation; land and expeditionary combat systems, armaments and munitions; shipbuilding and marine systems; and information systems and technologies. Formed in 1952, GD has grown steadily through the acquisition of many businesses.

3. PepsiCo (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.

4. Pfizer (PFE) Healthcare

Headquartered in New York and founded in 1849, PFE is one of the world's largest pharmaceutical firms. The company discovers, develops, and manufactures healthcare products. Prescription drugs and vaccines account for almost 90% of PFE's sales. Its brands include Prevnar 13, Xeljanz, Eliquis, Lipitor, Celebrex, Pristiq, and Viagra.

5. Bristol Myers Squibb (BMY)Healthcare

BMY discovers, develops, licenses, manufactures, markets, distributes, and sells biopharmaceutical products worldwide. The company's pharmaceutical products include chemically synthesized drugs administered as tablets or capsules. It also uses biologics to produce products administered through injections or by infusion. BMY was founded in 1887 and is headquartered in New York, New York.

6. Emerson Electric (EMR) Industrials

EMR provides technology and engineering solutions to industrial, commercial, and consumer markets worldwide. The company is engaged in the design, manufacture, and sale of a broad range of electrical, electromechanical, and electronic products and systems. EMR was founded in 1890 and is headquartered in St. Louis, Missouri.

7. 3M (MMM) Industrials

MMM is a diversified technology company with worldwide operations. The company has leading positions in 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.

8. Public Service Enterprise Group (PEG) Utilities

PEG is an energy holding company with operations in the Northeastern and Mid-Atlantic United States. The company transmits and distributes electricity and natural gas. It operates nuclear, coal, gas, oil-fired, and renewable generation facilities with a generation capacity of about 12,000 megawatts. PEG was founded in 1985 and is headquartered in Newark, New Jersey.

9. Caterpillar (CAT) Industrials

CAT was founded in 1925 and is headquartered in Deerfield, IL. The company manufactures construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. CAT provides technology for the construction, transportation, mining, forestry, energy, logistics, electronics, financing, and electric power generation.

10. Pinnacle West Capital (PNW) – Utilities

PNW is a holding company that provides retail and wholesale electric services primarily in the state of Arizona. Its subsidiary, Arizona Public Service Company, is a vertically-integrated electric that generates, transmits, and distributes electricity using coal, nuclear, gas, oil, and solar resources. PNW founded in 1920 and is headquartered in Phoenix, Arizona.

Please note that the top 10 DG stocks are candidates for further analysis, not recommendations.

Key Metrics and Fair Value Estimates

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.

Table created by the author; includes data sourced from Dividend Radar

I color-code CDN according to the likelihood of generating annualized returns of at least 8%. Green means likely, yellow means less likely, and red means unlikely. I consider green CDNs to be favorable. In this month's top 10 list, four stocks have favorable CDNs.

Commentary

An equal-weighted portfolio of the top 10 DG stocks would have returned -8% over the last 5-years, compared with 10% returned by the S&P 500 over the same period. Of the 10 stocks- PFE, PNW, and PEG offer the highest yields, all above 4%.

Source: Finbox.com

MRK is the only DG stocks with a perfect quality score of 25. GD is discounted most and MMM offers the most favorable CDN.

I own essentially full-size positions in all positions except PNW, which certainly presents a good opportunity for me to add some shares. To turn PNW into a full position, I'll need to add about 75 shares. (I consider a full position to be about 1% of total portfolio value).

Of the stocks I don't own, PEG looks the most interesting. It offers an attractive 4.13% yield at $47.50 per share. PEG is a Dividend Challenger with a 9-year dividend increase streak and consistent dividend growth:

Source: FAST Graphs

In the FAST Graphs chart, the black line represents the share price, and the blue line represents the calculated P/E multiple at which the market has tended to value the stock over time. The orange line is the primary valuation reference line. It is based on one of three valuation formulas depending on the earnings growth rate achieved over the time frame in question. (The Adjusted Earnings Growth Rate represents the slope of the orange line in the chart).

PEG's price line is just above the stock's calculated P/E multiple, so according to F.A.S.T. Graphs, the stock is trading at a small premium to fair value. (My fair value estimate includes a forward-looking component, somewhat represented in the FAST Graphs chart by the dashed lines.)

An investment in PEG in January 2010 would have returned 6.9% on an annualized basis (with dividends included). In comparison, the S&P returned 11.6% over the same period.

Concluding Remarks

In this article, I ranked DG stocks in the Dividend Radar list that yield at least 3% and are trading below my fair value estimates. Four stocks in the Industrials sector made the top 10, while three stocks in the Healthcare sector and two stocks in the Utilities sector also made the list. One Consumer Staples sector stock rounds out the top 10 this month.

I own six of the stocks in this month's top 10 and I'm considering adding shares to my PNW position and possibly opening a position in PEG after doing some due-diligence research.

Thanks for reading and take care, everybody!

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

This article was written by

FerdiS profile picture
26.15K Followers
FerdiS invests in dividend growth stocks and writes options to boost dividend income. He manages DivGro, a portfolio of mainly dividend growth stocks created in January 2013. With investment and trading experience spanning nearly 20 years, FerdiS enjoys writing articles about dividend growth investing, options trading, stock selection, portfolio management, and passive income generation. His DivGro blog hosts more than 1,000 posts and a live, public spreadsheet with full details of his DivGro portfolio, allowing readers to follow along in his investment journey. FerdiS is collaborating with the founders of Portfolio Insight, an online platform for portfolio management and investment analysis. Together, we maintain and publish Dividend Radar, a free spreadsheet of dividend growth stocks, on a weekly basis.

Disclosure: I am/we are long MRK, GD, PEP, PFE, PNW. 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.

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