Dividend Growth Stock Watchlist - March 2021
Summary
- There are 20 stocks on my dividend growth watchlist for March 2021.
- The average 10-year dividend growth rate for these stocks is 15.13%.
- Currently, 7 stocks are undervalued based dividend yield theory.
- An equally-weighted portfolio of these 20 stocks would have outperformed the Vanguard Dividend Appreciation ETF (VIG) by more than 2% through the first two months of 2021.
Dividend Growth Watchlist Criteria
The companies listed on this watchlist are stable with a track record of raising their dividends consistently. Each of the companies listed below have a market cap of at least $20 billion. The company must also have a "Wide" economic moat according to Morningstar. This ensures a company I consider for investment has a sustainable competitive advantage for the foreseeable future. A S&P Capital IQ Earnings and Dividend Ranking of A or A+ helps to establish the company has achieved and should continue to achieve lower price volatility when compared to the broader market. Next, since this is a dividend growth watchlist it would logically make sense to measure a company's dividend growth. In this case, a company needs to have a 10 year dividend growth rate of 7% or greater to ensure growth in the dividend itself, in addition to being a quality company. The company should have room to grow their dividend too, so a payout ratio of 50% or less is used as the final filter.
I use the dividend yield theory to determine if a stock is potentially overvalued or undervalued. This idea suggests a company's yield will revert to the norm over time. An example below is The Bank of New York Mellon (BK); the current yield is significantly greater than its five year average suggesting it could be undervalued. Obviously, your own due diligence should be done before investing in these or any company, dividend yield theory should be used to more or less guide you towards potential investments.
| Symbol | 10 Year DGR | Dividend Yield | Div. Yield (5 Yr Avg) | Overvalued / Undervalued |
| ACN | 11.02% | 1.41% | 1.63% | 13% |
| AMAT | 12.28% | 0.78% | 1.37% | 43% |
| BK | 13.16% | 2.75% | 2.12% | -30% |
| BLK | 13.76% | 2.35% | 2.41% | 2% |
| CLX | 7.54% | 2.41% | 2.33% | -3% |
| CMCSA | 17.15% | 1.82% | 1.80% | -1% |
| CNI | 15.59% | 1.73% | 2.23% | 22% |
| CSX | 12.28% | 1.22% | 1.46% | 16% |
| CTAS | 18.18% | 0.88% | 1.00% | 12% |
| GD | 9.91% | 2.79% | 2.16% | -29% |
| HD | 20.30% | 2.60% | 2.11% | -23% |
| LMT | 14.02% | 3.05% | 2.65% | -15% |
| MA | 38.83% | 0.49% | 0.55% | 11% |
| MKC | 9.08% | 1.61% | 1.56% | -3% |
| NOC | 11.91% | 1.93% | 1.61% | -20% |
| ROP | 17.90% | 0.60% | 0.56% | -7% |
| SCHW | 11.61% | 1.11% | 1.04% | -7% |
| TD | 9.81% | 3.97% | 5.14% | 23% |
| TROW | 12.79% | 2.50% | 2.59% | 3% |
| V | 25.38% | 0.59% | 0.61% | 3% |
Goal
The goal of my dividend growth watchlist is to discover companies to add to my dividend growth portfolio in an attempt to consistently exceed the market return of the Vanguard Dividend Appreciation Fund (VIG). Through the first two months of the year, an equally weighted portfolio of the 20 stocks mentioned above would have outperformed the VIG by more than 2%. The VIG lost 1.39% through the end of February while the stocks above returned 80 basis points.
Data by YChartsTop 2 stocks
As can be seen below Applied Materials (AMAT) was the best performing stock of the watchlist through February. However, when looking at the watchlist and reviewing the overvalued and undervalued column above this stock could be grossly overvalued based on dividend yield theory. This suggests the runup so far this year may not have been warranted and caution should be used before initiating or adding to this position.
The second best performing stock was The Charles Schwab Corporation (SCHW) which has returned nearly 17% year to date. A look at this company on the watchlist shows it may be slightly undervalued even after its gains this year. The company may be beginning to realize some cost synergies after its completed acquisition of TD Ameritrade in the fourth quarter of last year. If I were to initiate a position in this company, I would like to wait for a pullback to give myself a greater margin of safety.
Bottom 2 Stocks
The worst performing stock through February was Roper Technologies (ROP), where its stock dropped more than 12%. A further look into this company reveals the drop occurred right after their earnings release on January 28, 2021. Since their earnings release, the stock has continued on a steady downward trend through the month of February dropping about 3%. Although ROP only yields about 0.60%, it is considered potentially undervalued by approximately 7% as of the end of February. This might be a good buying opportunity if you are considering a stock which has a combination of yield and stock appreciation.
The second worst performing stock was McCormick & Company (MKC) which lost nearly 12%. Their recent acquisition Cholula Hot Sauce, which closed in the fourth quarter of 2020, was for $800 million. I believe this was an unnecessary acquisition given that McCormick already owns the Frank's RedHot sauce brand which they acquired in 2017 from RB Foods. Additionally, the price paid for Cholula Hot Sauce was considered high by CFRA, due to the company paying 25x EBITDA, which is a higher than normal premium for this sector. Lastly, the company's acquisition of RB Foods in 2017 is still lingering due to the high price paid for that company as well ($4.21 billion). The company's long term debt prior to the acquisition was less than $2 billion. Since the acquisition, their debt ballooned to above $5 billion and is still hovering near that amount more than 3 years later.
| Ticker | Return(through Feb.) |
| ACN | -3.62% |
| AMAT | 37.20% |
| BK | 0.11% |
| BLK | -3.75% |
| CLX | -9.87% |
| CMCSA | 1.07% |
| CNI | -0.48% |
| CSX | 1.19% |
| CTAS | -8.04% |
| GD | 10.63% |
| HD | -2.74% |
| LMT | -6.23% |
| MA | -0.74% |
| MKC | -11.84% |
| NOC | -3.81% |
| ROP | -12.29% |
| SCHW | 16.74% |
| TD | 8.14% |
| TROW | 7.10% |
| V | -2.75% |
(Source: Portfolio Visualizer)
Final Thoughts
This dividend growth watchlist will be used on a monthly basis to identify companies worthy of further research. Stock prices fluctuate all the time and sometimes there are legitimate reasons and other times there are not. I believe if you can identify the reasons and determine for yourself if a decline is stock price is justified (or not), you can gain an advantage over other investors. Furthermore, buying a stock when its yield is higher relative to its historical yield mitigates some risk and helps to ensure you likely are not overpaying for a company at its current levels.
Next month I intend to review the returns of the stocks listed above and discuss how their returns compared to the Vanguard Dividend Appreciation Fund. Also, I will run my screener again to determine a new watchlist for April as well as discuss what companies fell off the list and which ones were added.
The above mentioned information should not be construed as investment advice. Every investor's situation is different and you should only invest in a company after doing your own due diligence.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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