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 DG stocks with high 5-year dividend growth rates and 1-year trailing total returns. Both these metrics are available in the Dividend Radar spreadsheet on a trailing twelve-month basis.
I use DVK Quality Snapshots to assess the quality of DG stocks and break ties in quality scores by considering additional metrics.
The latest Dividend Radar list (dated July 24, 2020) contains 766 stocks.
I decided to screen for DG stocks with dividend growth rates [DGRs] of at least 10%. Additionally, I only wanted to consider stocks that have performed well in the past twelve months, despite the challenges presented by the COVID-19 pandemic. So I screened for DG socks with 1-year trailing total returns [TTRs] of at least 16%
No fewer than 58 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:
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.
Here are this month's top 10 DG stocks in rank order:
Top 10 Dividend Growth Stocks for July 2020
Created by the author based on the ranking in this article.
I own all of this month's top 10 DG stocks in my DivGro portfolio.
The following company descriptions are the author's summary of company descriptions sourced from Finviz.
1 • Microsoft Corporation (MSFT) -- Information Technology
Founded in 1975 and based in Redmond, Washington, MSFT is a technology company with worldwide operations. The company’s products include operating systems, cross-device productivity applications, server applications, productivity and business solutions applications, software development tools, video games, and online advertising. MSFT also designs, manufactures, and sells several hardware devices.
2 • NIKE, Inc. (NKE) -- Consumer Discretionary
Founded in 1964 and headquartered in Beaverton, Oregon, NKE is engaged in the design, development, marketing, and selling of athletic footwear, apparel, equipment, and accessories. The company's portfolio brands include NIKE, Jordan, Hurley, and Converse. NKE sells its products to retail accounts, through NIKE-owned retail stores and websites, and through independent distributors and licensees.
3 • Apple Inc. (AAPL) -- Information Technology
Headquartered in Cupertino, California, AAPL designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players. The company also sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. AAPL was founded in 1977.
4 • The Home Depot, Inc. (HD) -- Consumer Discretionary
Founded in 1978 and based in Atlanta, Georgia, HD is a home improvement retailer that sells an assortment of building materials, home improvement products, and lawn and garden products. HD provides installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me, and professional customers.
5 • 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. The company provides medical benefits to customers in the United States and in more than 125 other countries.
6 • BlackRock, Inc. (BLK) -- Financials
BLK is an investment management company that provides a range of investment and risk management services to institutional and retail clients across the world. The company’s offerings include single and multi-asset class portfolios investing in equities, fixed income alternatives, and money market instruments. BLK was founded in 1988 and is based in New York City.
7 • Illinois Tool Works Inc. (ITW) -- Industrials
Founded in 1912 and headquartered in Glenview, Illinois, ITW is a diversified, global company that manufactures and sells industrial products and equipment worldwide. ITW operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products.
8 • Amgen Inc. (AMGN) -- Health Care
Based in Thousand Oaks, California, AMGN is a biotechnology company. The company discovers, develops, manufactures, and delivers human therapeutics worldwide. It offers products for the treatment of serious illnesses in the areas of oncology/hematology, cardiovascular disease, inflammation, bone health, nephrology, and neuroscience. AMGN was founded in 1980.
9 • Hormel Foods Corporation (HRL) -- Consumer Staples
HRL is a multinational manufacturer and marketer of consumer-branded food and meat products. The company sells its products through sales personnel, as well as through independent brokers and distributors. Customers include retailers, hospitals, nursing homes, and marketers of nutritional products. HRL was founded in 1891 and is based in Austin, Minnesota.
10 • NextEra Energy, Inc. (NEE) -- Utilities
NEE, formerly known as FPL Group, is an electric power company with approximately 42,500 MW of generating capacity in 26 states in the United States and 4 provinces in Canada. The company generates electricity from gas, oil, coal, petroleum coke nuclear, solar, and wind. NEE was founded in 1984 and is based in Juno Beach, Florida.
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.
The final column (1-Yr TTR) shows the 1-year trailing total returns.
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, five stocks have favorable CDNs.
This month's top 10 list has representatives in seven GICS sectors. I find this somewhat surprising, as I would have expected the Information Technology and Health Care sectors to dominate more.
Looking at the table of key metrics and fair value estimates, MSFT and NKE have perfect quality scores of 25. UNH is discounted most and HD and UNH offer the most favorable CDNs. AMGN and BLK offer the highest yields. AAPL has a spectacular 1-year TTR of 86.5%.
Here's a comparative analysis of an equal-weighted portfolio of this month's top 10 DG stocks, courtesy of Finbox.com:
The portfolio would have returned 133% over the last 5-years, compared with 52% returned by the S&P 500 over the same period. In the past year, the portfolio would have returned 34%. According to Finbox, only two of the stocks are trading below fair value, according to Finbox (BLK and UNH). Four of the stocks (MSFT, AAPL, UNH, and ITW) have high Piotroski scores, indicating they are good value stocks (Scores of 8 or 9 are considered good value).
I own full-size positions in all positions except NKE, HRL, and NEE. Unfortunately, these stocks are trading well above my fair value estimates, so now is not a good time to increase my holdings.
If I didn't own a full position in UNH, it would have been my first pick of this month's top 10. UNH offers the best discount, the most favorable CDN, one a high Piotroski score.
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 timeframe in question. (The Adjusted Earnings Growth Rate represents the slope of the orange line in the chart).
UNH'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 UNH in January 2010 would have returned 25% on an annualized basis (with dividends included). In comparison, the S&P returned 11.8% over the same period.
In this article, I ranked DG stocks in the Dividend Radar list that have 5-year dividend growth rates of at least 10% and 1-year trailing total returns of at least 16%.
The top 10 list is surprisingly well distributed sector-wise, with representatives in seven GICS sectors. The Consumer Discretionary, Health Care, and Information Technology sectors have two representatives each, while the Consumer Staples, Financials, Industrials, and Utilities sectors have one representative each.
I own all the stocks in this month's top 10 and I'm not looking to add any shares at this time, though I think readers could look at UNH as a good candidate for some due-diligence research.
Thanks for reading and take care, everybody!
This article was written by
Disclosure: I am/we are long AAPL, AMGN, BLK, HD, HRL, ITW, MSFT, NEE, NKE, UNH. 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.