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4 Dividend Growth Opportunities To Benefit From Market Decline

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Includes: AAPL, ABBV, AMZN, LMT, MO, MSFT, QQQ, SNOW, SPY, STOR, TSLA
by: Dumb Wealth
Dumb Wealth
Dividend Investing, Macro, portfolio strategy, gold
Summary

Stocks are on sale. Yet many allow emotions to get in the way of their investing success.

Research shows that the best long-term investing strategy is to invest when you have the money. Avoid market timing.

I neither have the time nor energy to track my investments constantly. I look for solid dividend growth companies I can buy and forget about.

I've identified four dividend growth companies that are currently trading 12-34% below their YTD highs and are worthy of further consideration.

The S&P 500 (SPY) is down roughly 10% from the all time high reached just a few weeks ago. The Nasdaq (QQQ) is down almost 13%.

So what's your plan?

ChartData by YCharts

Over the past few months, I've had countless conversations with investors who were 'waiting for a correction' to enter the market. They didn't want to chase the rally. Of course, while they waited, the markets continued to rise and these investors missed out on tremendous gains.

Now the market is correcting, one might think most of these people would be jumping at the new bargains they were waiting for.

In reality, they're not.

Unfortunately, stocks are the only thing people don't want to buy when they're on sale. Right now we're seeing a bargain basement sale on many stocks. As of the date of writing, Microsoft (MSFT), AbbVie (ABBV), Altria (MO), Amazon (AMZN) and Apple (AAPL) are all up to 20% off!

ChartData by YCharts

Of course, I understand the psychology behind a) waiting for a correction and b) missing the correction. As someone who wants a good bargain, I suffer from the same biases.

Investors wait for a correction (and miss out on gains) because they don't want to pay more for something that was cheaper last week. The same investors subsequently miss buying the correction because they're afraid prices will get even cheaper.

These emotional reactions to market movements are precisely why some investors - even index investors - underperform the market over the long run. In reality, the buy-the-dip approach doesn't work most of the time, based on backtesting back to 1980 conducted by DumbWealth. The conclusion from this research was if you have a long time horizon, the best time to invest is when you have the money.

Over the long run, even a 20% correction looks like a blip. Find the 2008 crash below. It looks inconsequential in the grand scheme of things. Even the worst market timer who invested right before the 2008 crash would have come out OK if they waited long enough. Over the long run, history has shown it pays to stay invested. (Note 1: I used a log scale for the chart below to remove the stretching effect of exponential growth on the line chart. Note 2: This chart uses price returns - if dividends are incorporated, the story looks even better for the buy-and-hold long-term investor.)

ChartData by YCharts

Just because 'whenever you have the money' is the best time to invest, doesn't mean you shouldn't be judicious with your investments. Investment returns are based on a combination of expected compensation for risk plus a deviation from intrinsic value. In my humble opinion, this removes many of the high-flying stocks (like Tesla (TSLA) and Snowflake (SNOW)) of the past few months from my list of potential candidates. Call me old school, but I just can't rationalize investing in a company trading at 10+ times revenues, never mind 100+. The sheer speed of revenue growth priced into those stocks also comes with a lot of downside if the actual numbers disappoint.

The argument I often hear is that these companies represent the future. However, what many investors fail to do is distinguish between a good company and a good stock. I like Zoom (NASDAQ:ZM). They offer a great product and a reasonable price. I also think they have a great business with booming demand. Still, I don't believe that justifies paying 102 times revenues. Even if I thought the stock might continue to rise over the near term, these types of over-priced investments aren't something I could simply buy and forget about for a decade. So I don't.

ChartData by YCharts

So while now (and any other point in time) is a good time to invest, I believe I would be better off putting cash to work in names that I don't have to worry about. I'd rather buy a good business at a good price than a rockstar company at a rockstar price. This way I can just invest in companies I know should exist for 10-20 years and forget about it. I'm lazy and have enough things to worry about.

Consequently, my preference is to invest in companies willing and able to give me cash every quarter. I get that it's total returns that matter, but I would rather automatically harvest my gains while the going's good than watch a good crop wither on the vine. This is why I invest in dividend growth stocks.

There are a handful of dividend growth companies trading at decent valuations that I currently like. The four below have stood out and are worthy of further investigation (data source for all info below is Seeking Alpha).

I initially looked at 5 factors when selecting these companies for further research:

1) Forward Revenue Growth: Positive growth tells me the company sells something people want. Revenue is the engine that drives all other metrics - earnings and cash flows. Revenues are real, while earnings can be manipulated.

2) Forward P/E: The P/E ratio is the entry-level valuation metric. It helps identify whether further research is warranted.

3) Yield: This can trip some people up. A high yield on its own isn't necessarily a good thing. However, a well-supported and growing yield (via growing revenue and a low payout ratio) is highly attractive for dividend growth investors.

4) 5 Year Dividend Growth Rate: While a long track record of dividend growth is comforting, the recent trend might be more indicative of a company's ability to grow dividends into the future.

5) Cash Dividend Payout Ratio: A dividend isn't worth much if a company has to draw down assets or borrow money to finance it. A solid company has enough free cash flow to cover its bills and return some money to stockholders.

Based on this criteria, I think the following four companies are quite attractive.

AbbVie - Low valuation, fast growth, high dividend

Forward Revenue Growth: 18%

Forward P/E: 8.64

Yield: 5.24%

5 Year Dividend Growth Rate: 21%

Cash Dividend Payout Ratio: 45%

Altria - Cheap, slow growing dividend king

Forward Revenue Growth: 2.07%

Forward P/E: 9.24

Yield: 8.63%

5 Year Dividend Growth Rate: 10%

Cash Dividend Payout Ratio: 61%

Lockheed Martin (LMT) - Modest valuation, decent growth, solid dividend

Forward Revenue Growth: 8.25%

Forward P/E: 16.33

Yield: 2.43%

10 Year Dividend Growth Rate: 10.39%

Cash Dividend Payout Ratio: 38.61%

Store Capital (STOR) - Reasonable valuation, solid growth, high dividend

Forward Revenue Growth: 12.99%

Forward P/FFO: 15.39

Yield: 5.12%

3 Year Dividend Growth Rate: 6%

Cash Dividend Payout Ratio: 78%

As an added bonus, all four of these companies are currently on sale, trading between 12 and 34% below their YTD highs! Who doesn't like a bargain.

ChartData by YCharts

I would be remiss to finish this article without showing the price-to-sales ratios for each of these companies, given how I showed it for Zoom and Snowflake. In my opinion, all companies are worthy of further investigation, but the 'back of the napkin' math for AbbVie suggests this company in particular needs to be looked at closely as a potential opportunity.

ChartData by YCharts

Thanks for reading. If you are interested in dividend growth stocks, please follow me for more.

Disclosure: I am/we are long ABBV, MO, STOR, LMT. 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.

Additional disclosure: This is not advice. These are the opinions of the author. Please contact a registered investment professional to discuss your personal financial circumstances. While every effort was made to ensure accuracy, the information in this article contains no warranties with regards to accuracy.