Quality Dividend Growth Stock Watchlist For April 2021
Summary
- I present 30 Quality Dividend Growth Stocks for consideration in April 2021.
- There are seven new stocks on this month's watchlist that can offer strong future dividend growth.
- The watchlist from March 2021 had a return of 5.65% last month.
- The fairly valued and undervalued stocks from last month's watchlist had a return of 7.39%.
Quality Stocks
Quality dividend stocks extended positive returns from February into March, turning green on a year-to-date basis. [VIG], the dividend appreciation ETF from Vanguard, gained 6.03% last month, and is now up 4.56% year-to-date. The watchlist for March offered a slightly less generous return of 5.65% and the fairly valued and undervalued stocks crushed the month with a total return of 7.39%.
Even though VIG beat the S&P 500 total return by 165 bps in March it still trails the broad index year-to-date. Interestingly, the tech sector has cooled off after a hot 2020 and trails the S&P 500 as well as the dividend appreciation ETF.
As the overall market keeps rising the dividend yield offered by the stocks on this watchlist is declining. Therefore, it is becoming more of a dividend growth watchlist with a focus on total return rather than just dividend income. Younger dividend investors, with a long investing timeline, can stand to benefit from adding quality dividend growth stocks into their portfolios.
I would recommend two approaches to dividend investing. The first is to dollar cost average into at least 10-20 or more quality dividend-paying stocks across multiple sectors and industries. By dollar cost averaging, you eliminate the risk of trying to value a stock and over a long enough period, theoretically, you will buy shares at market highs, lows, and in-between resulting in an average cost basis somewhere in the middle. The second method carries a little more risk. Invest in undervalued stocks also dollar cost averaging into at least 10-20 unique quality dividend stocks across multiple sectors and industries. The additional risk with this approach comes from the chance that your valuation method proves to be incorrect. However, by investing in multiple unique stocks the odds that you accurately identify at least a few undervalued stocks increases. The resulting upside from a few correct picks may more than offset the underperformance from the bad ones.
Watchlist Criteria
The criteria used to determine which stocks are included in my quality dividend stock watchlist remain unchanged for April 2021. It is made up of the 8 factors listed below, that have historically outperformed the broad universe of dividend-paying stocks when analyzed collectively.
- Market Cap of at least $10 billion
- Payout Ratio no greater than 70%
- 5-year Dividend Growth rate of at least 5%
- 5-year Revenue Growth rate of at least 2%
- 5-year EPS Growth rate of at least 2%
- S&P Earnings and Dividend Rating of B+ or better
- Wide or Narrow Moat (Morningstar)
- Exemplary or Standard Management Team (Morningstar)
The rules identified 94 stocks for the month of March that were further ranked based on their individual metrics with the exclusion of the market cap. The top 30 stocks were selected for consideration and will potentially be added to my portfolio. The long-term hypothesis for this watchlist is that it will outperform a broad quality dividend fund such as Vanguards dividend appreciation ETF, VIG.
Watchlist For April 2021
Above are the 30 stocks I am considering for further evaluation during the month of April. They are sorted in descending order by their rank and 5-year dividend growth rate. The blue highlight identifies stock that are new to the watchlist. The green highlight in the "O/U" column identifies stocks that are currently no more than 5% overvalued based on Dividend Yield Theory. Collectively the 30 stocks offer a dividend yield of 0.95%, the potentially fairly valued and undervalued stocks offer a slightly better average dividend yield of 1.23%.
I am a buy and hold investor and use this watchlist to identify stocks to include in my portfolio or to add capital to existing positions. I own all of these stocks, with a few of the new names to the list being recent additions to my personal portfolio.
Valuation
Valuation is computed using the dividend yield theory that compares a stock's current dividend yield to its historical dividend yield. If the current dividend yield is greater than the historical dividend yield, it implies potential undervaluation and vice versa. I like using this valuation method as it is simple, easy, and quick to compute, but like any other valuation method, it is just an approximation of valuation. One could argue that there are better methods to estimate fair value such as a discounted cash flow model. And while that method is probably more accurate, it has its own limitations in addition to the time required to compute it.
Here is a closer look at the 7 new stocks on this month's watchlist.
CDW Corp. (CDW) currently offers a modest almost 1% dividend yield that is in line with its trailing dividend yield. Dividend yield theory would suggest the stock may be trading for a fair price right now. This is an ideal stock for dividend growth investors, with a very strong 5-year dividend growth rate of 37.79%. The company has a payout ratio below 30% with plenty of room to continue growing its dividend stream in the future. Over the past 8 years CDW had a 32.38% CAGR that would have turned a $10K investment into about $76K (01/2014-03/2021). CDW went public (again) in July of 2013 so a full decade of data is not available.
Dollar General (DG) currently offers a 0.83% dividend yield that is below its trailing dividend yield. Dividend yield theory would suggest the stock is overvalued right now. To compensate for the low dividend yield investors are rewarded with a strong 5-year dividend growth rate of 10.35%. With a payout ratio below 15% the company has plenty of room to grow its dividend stream in the future. Over the last decade Dollar General had a 22.32% CAGR that would have turned a $10K investment into about $96K (01/2010 - 03/2021).
Lithia Motors (LAD) currently offers a tiny dividend yield of 0.31% that is significantly lower than its trailing dividend yield. Based on dividend yield theory the stock appears to be grossly overvalued. However with a 5-year dividend growth rate of 9.93% and a payout ratio of 6% the stock may continue to offer solid dividend growth in the future. Over the last decade Lithia Motors had a 42.47% CAGR that would have turned a $10K investment into about $536K (01/2010 - 03/2021).
Lowe's (LOW) currently offers a dividend yield of 1.26% that is below its trailing dividend yield. Dividend yield theory suggests the stock is trading for a premium right now. Long term investors have been rewarded with above average dividend growth at a rate of 17.14% during the last 5 years. The company has a payout ratio of about 30% leaving plenty of room for future dividend increases. Over the last decade Lowe's had a 22.68% CAGR that would have turned a $10K investment into about $99K (01/2010 - 03/2021).
Moody's (MCO) currently pays a dividend yield of 0.83% that is below its trailing dividend yield. Dividend yield theory suggests the stock is trading for a premium right now. Moody's has a strong 5-year dividend growth rate of 10.49% with a low payout ratio of less than 25%. Over the last decade Moody's had a 25.55% CAGR that would have turned a $10K investment into about $129K (01/2010 - 03/2021).
NVIDIA (NVDA) currently pays a dividend yield of 0.12%, you can barely call it a dividend stock. They have grown that dividend at a rate of 10.13% during the past 5-years and have a payout ratio of about 10%. While this may not be an ideal stock for dividend investors it is an excellent stock for dividend growth investors who also seek capital appreciation. Over the last decade NVIDIA had a 35.73% CAGR that would have turned a $10K investment into about $311K (01/2010 - 03/2021).
Thermo Fisher Scientific (TMO) also pays a rather low dividend yield of 0.23% that happens to be below its trailing dividend yield. The 5-year dividend growth rate is not great for such a low yielding stock, sitting just north of 7%. Thermo Fisher has instead offered investors excellent capital appreciation with a small dividend stream. Over the last decade Thermo Fisher Scientific had a 22.69% CAGR that would have turned a $10K investment into about $100K (01/2010 - 03/2021).
Past Performance
The watchlist had a strong total return for March of 5.65%. The fairly valued and undervalued stocks performed even better, returning 7.39%. VIG finished the month with a total return of 6.03%. And the S&P total return trailed all three with a gain of 4.38%. After the strong performance in March, the fairly valued and undervalued stocks move ahead of the S&P total return since inception (9/1/20) by 6 basis points. VIG remains in a close third place, and the entire watchlist trails by about 3%.
Eq-Alloc | Under | VIG | SPTR | |
Sep 20 | -3.09% | -2.82% | -1.05% | -4.00% |
Oct 20 | -3.84% | -3.42% | -2.27% | -2.66% |
Nov 20 | 10.74% | 11.17% | 10.04% | 10.95% |
Dec 20 | 2.99% | 2.35% | 2.52% | 3.84% |
Jan 21 | -4.72% | -6.45% | -2.92% | -1.01% |
Feb 21 | 4.16% | 6.61% | 1.58% | 2.76% |
Mar 21 | 5.65% | 7.39% | 6.03% | 4.38% |
Since Inception | 11.43% | 14.37% | 14.07% | 14.31% |
The top 3 stocks by total return in March 2021 were:
The bottom 3 stocks by total return in March 2021 were:
Performance by Sector for March 2021
- Consumer Discretionary +12.24% (3 stocks)
- Industrials 10.07% (4 stocks)
- Materials 8.48% (1 stock)
- Healthcare 7.80% (3 stocks)
- Info Technology 3.66% (11 stocks)
- Financials 2.57% (8 stocks)
Buy and Hold Approach
Since I practice a buy and hold approach with my personal investments, I thought it would be useful to see how that approach would perform using this watchlist. The premise is simple, each month you allocate an equal amount of capital to all stocks from the watchlist and hold that position for the long-term. In the image below, you can see the monthly and cumulative return for equally allocating to all stocks on the watchlist, just the fairly valued and undervalued stocks and finally allocating all capital to VIG.
Eq-Alloc | Under | VIG | |
Sep 20 | -3.09% | -2.82% | -1.05% |
Oct 20 | -3.84% | -3.26% | -2.27% |
Nov 20 | 10.68% | 11.39% | 10.04% |
Dec 20 | 2.95% | 2.61% | 2.52% |
Jan 21 | -4.94% | -5.84% | -2.92% |
Feb 21 | 2.65% | 4.41% | 1.58% |
Mar 21 | 6.52% | 8.18% | 6.03% |
Cumulative | 10.37% | 14.28% | 14.07% |
The returns for March 2021 in the two mock buy-and-hold portfolios were better than the respective returns for the watchlist. Both outperformed VIG, and the fairly valued and undervalued buy-and-hold portfolio also moved into the lead. The entire watchlist is significantly underperforming under this approach but we only have 7 months of data thus far. My hypothesis still stands, I believe over the long-term both the watchlist and the fairly valued and undervalued portfolios will generate alpha over VIG.
Video
If you'd like to see more information on the 30 quality dividend stocks from this month's watchlist please check out the video below.
This article was written by
Analyst’s Disclosure: I am/we are long ALL STOCKS. 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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