10 Dividend Growth Stocks For August 2020

Aug. 11, 2020 1:49 PM ETADP, BEN, GILD, IBM, MDT, MMM, PNW, SBUX, SNA, TD, TD:CA50 Comments
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FerdiS
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Summary

  • In my monthly series of 10 Dividend Growth Stocks, I rank a selection of dividend growth stocks in Dividend Radar and present the 10 top-ranked stocks for consideration.
  • I use DVK Quality Snapshots to obtain quality scores and rank stocks by breaking ties with additional metrics.
  • This month, I'm presenting stocks whose current dividend yield is above its 5-year average dividend yield by at least 10%.
  • Additionally, I screened for stocks with yields of at least 3%, or with favorable Chowder Numbers.

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 investment-grade DG stocks with a current dividend yield of a least 10% above the 5-year average dividend yield. Additionally, I screened for stocks with yields of at least 3% or with favorable Chowder Numbers [CDNs]. The CDN of a DG stock is the sum of its yield and 5-year dividend growth rate. These metrics are provided by Portfolio Insight.

I use DVK Quality Snapshots to assess the quality of DG stocks and break ties in quality scores by considering additional metrics. Stocks with quality scores of 15 or higher are considered to be investment-grade stocks.

Screening and Ranking

The latest Dividend Radar list (dated August 7, 2020) contains 762 stocks.

The first screen I applied looked for investment-grade DG stocks with a current dividend yield at least 10% above the 5-year average dividend yield.

Why is this screen interesting? Well, if a stock's current dividend yield is higher than its 5-year average dividend yield, then the stock likely is undervalued.

Of the 762 DG stocks in Dividend Radar, 141 stocks qualified.

The second screen I applied considered stocks yielding at least 3% or stocks with favorable CDNs. I consider stocks that are likely to deliver annualized returns of at least 8%, favorable. For stocks yielding less than 3%, a CDN of 15 or higher is required. Stocks that yield at least 3% require a CDN of at least 12. Utilities get a special dispensation if they yield more than 4%. In that case, the CDN only needs to equal 8 or higher.

In all, 113 stocks passed both screens. I ranked these stocks and present the 10 top-ranked stocks for consideration.

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 Morningstar and Finbox. 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 Dividend Growth Stocks for August

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

Top 10 Dividend Growth Stocks for August 2020

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

Click here to review the July Edition of 10 Dividend Growth Stocks

I own all but one 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 • 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 • Medtronic plc (MDT) -- Healthcare

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.

3 • 3M Company (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; healthcare; industrial; safety, security and protection services; transportation; and other businesses. MMM was founded in 1902 and is headquartered in St. Paul, Minnesota.

4 • Pinnacle West Capital Corporation (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.

5 • The Toronto-Dominion Bank (TD) -- Financials

TD, together with its subsidiaries, provides various personal and commercial banking products and services in Canada and the United States. The company operates through three segments: Canadian Retail, U.S. Retail, and Wholesale Banking. TD was founded in 1855 and is headquartered in Toronto, Canada.

6 • Starbucks Corporation (SBUX) -- Consumer Discretionary

SBUX is a roaster, marketer, and retailer of specialty coffee. The company roasts and sells coffees, and other beverages and fresh food items, through company-operated stores. It also sells a range of coffee and tea products and licenses its trademarks through other channels. SBUX was founded in 1985 and is based in Seattle, Washington.

7 • International Business Machines Corporation (IBM) -- Information Technology

Founded in 1910 and headquartered in Armonk, New York, IBM is a global information technology (IT) company that offers consulting and application management services, IT infrastructure services, and infrastructure technologies. IBM's Watson is a cognitive computing platform that interacts in natural language, processes big data, and learns from interactions with people and other computing systems.

8 • Snap-on Incorporated (SNA) -- Industrials

SNA manufactures and markets tools, equipment, diagnostics, repair information, and systems solutions. It serves aviation and aerospace, agriculture, construction, government and military, mining, natural resources, power generation, and technical education industries, as well as vehicle dealerships and repair centers. SNA was founded in 1920 and is headquartered in Kenosha, Wisconsin.

9 • Gilead Sciences, Inc. (GILD) -- Healthcare

GILD is a research-based biopharmaceutical company that discovers, develops, and commercializes innovative medicines. The company's primary areas of focus include human immunodeficiency virus, liver diseases such as chronic hepatitis C virus infection and chronic hepatitis B virus infection, oncology and inflammation, and serious cardiovascular and respiratory conditions. GILD markets its products through commercial teams and in conjunction with third-party distributors and corporate partners. The company was founded in 1987 and is headquartered in Foster City, California.

10 • Franklin Resources, Inc. (BEN) -- Financials

BEN is a global investment management company operating as Franklin Templeton Investments. The company provides investment management and related services to retail, institutional, and high net-worth clients in jurisdictions around the world. BEN was founded in 1947 and is based in San Mateo, California with an additional office in Hyderabad, India.

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 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. Green CDNs are favorable. PNW and TD qualify due to their higher yields (of at least 3%).

Commentary

All of the stocks trade at a discount to my fair value estimates, which is unsurprising given my first screen.

BEN, IBM, and GILD are discounted the most. ADP has a perfect quality score of 25, and GILD has the highest CDN by far. IBM and TD offer the highest yields.

Here's a comparative analysis of an equal-weighted portfolio of this month's top 10 DG stocks, courtesy of Finbox.com:

Source: Finbox.com

The portfolio would have returned only 10.45% over the last 5-years, compared with 69.14% returned by the S&P 500 over the same period. Only ADP outperformed the S&P 500 over this timeframe, while four stocks show negative returns:

Chart created by the author using data from Google Finance

According to Finbox.com, TD is trading at a slight premium, while the remaining stocks are trading below fair value. The portfolio has a fair value upside of about 14%.

My positions in ADP, TD, SNA, and IBM are not full-size positions, so I can consider adding shares when appropriate. (Somewhat arbitrarily, I define a full-size position as about 1% of total portfolio value). ADP with its perfect quality score and IBM with its high yield, seem most attractive.

Here are two charts, courtesy of Portfolio Insight, showing the current dividend yield plotted relative to the trailing 5-year average yield:

Source: Portfolio Insight (dated 11 August 2020)

Source: Portfolio Insight (dated 11 August 2020)

For both ADP and IBM, it appears to be a good time to consider buying shares. ADP is about 19% above its 5-year average yield, while IBM is about 22% above its average yield.

Concluding Remarks

In this article, I ranked DG stocks in the Dividend Radar list whose current dividend yield is above the 5-year average dividend yield by at least 10%. Additionally, I screened for stocks with yields of at least 3% or with favorable Chowder Numbers.

The top 10 stocks are high-quality DG stocks with upside potential based on their current valuations and favorable (or near-favorable) Chowder Numbers. Some of these stocks have performed poorly in recent years, so readers should investigate and understand the reasons for that poor performance before investing.

I personally own all but one of this month's top 10 and may consider rounding out my ADP and IBM holdings to full positions.

Thanks for reading and take care, everybody!

This article was written by

FerdiS profile picture
26.27K 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 ADP, MDT, MMM, PNW, TD, SBUX, IBM, SNA, GILD. 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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