The Highest Quality Dividend Growth Stocks

Aug. 03, 2021 2:01 PM ETAAPL, ACN, ADP, CME, COST, CSCO, GD, HD, HON, INTC, JNJ, LLY, LMT, MA, MDT, MRK, MSFT, NKE, PEP, PG, SYK, TXN, UNP, V, WMT138 Comments
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FerdiS
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Summary

  • This article updates one published by David Van Knapp in June 2020.
  • We both use the DVK Quality Snapshots scoring system to assess the quality of dividend growth stocks.
  • The system employs five quality indicators from independent sources and assigns 0-5 points to each quality indicator, for a maximum of 25 points.
  • Only 60 companies made it through our stringent quality screens, and seven companies have perfect quality scores.
  • Two bonus lists are provided, one containing stocks that failed the S&P Credit Rating screen and another containing stocks that scored at least 20 total points but otherwise failed our stringent quality screens.
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David Van Knapp [DVK] presented a simple yet elegant system to assess the quality of dividend growth [DG] stocks in this article on high-quality, high-yield DG stocks. The system employs five widely used quality indicators from independent sources and assigns 0-5 points to each quality indicator, for a maximum of 25 points.

After reading his article, I abandoned my complex and somewhat esoteric system in favor of using DVK Quality Snapshots. While there are other factors to consider when selecting stocks for possible investment, I love the simplicity of DVK Quality Snapshots. It does a remarkable job identifying high-quality stocks!

In the last few years, David and I have corresponded about DVK Quality Snapshots. We discussed adding additional quality indicators, and we made minor adjustments based on feedback from readers of my articles. We hope to continue using the same system, even if there are incidental differences in our approaches.

The goal of this article is to identify the highest quality DG stocks according to DVK Quality Snapshots. I'll use the same stringent screens that DVK used in his June 2020 article and highlight the differences between DVK's results last year and my results this year. It is informative to see how the quality scores of DG stocks have changed over the past year or so.

About Quality

DVK wrote in his article that "Quality" is a nebulous concept.

I agree, having learned from comments to my articles that DG investors consider many different factors when they think of quality. Financial health, dividend safety, economic moat, profitability, growth prospects, and credit worthiness are some factors that DG investors consider when considering candidates for their portfolios.

In devising DVK Quality Snapshots, DVK decided to consult widely-used and trusted sources that rate or rank various factors related to quality:

Having worked in the professional information industry for many years, I have more faith in data providers that get paid for providing accurate information rather than brokerage analysts that may have a hidden motive to push one stock over another.

DVK identified Value Line, Morningstar, S&P Global, and Simply Safe Dividends as trustworthy sources of quality indicators.

Quality Scoring

Here are the quality indicators used in determining a stock's quality score:

Readers can learn more about each quality indicator by following the provided links.

VL's Safety Rank measures the total risk relative to approximately 1,700 other stocks covered by VL. The safest stocks are assigned a rank of 1, whereas the riskiest stocks are assigned a rank of 5.

VL also provides Financial Strength ratings, from A++ to C, in nine steps. The lowest rating is reserved for companies in serious financial difficulty. Factors considered in assigning ratings include balance sheet strength, corporate performance, market capitalization, and stability of returns.

The next quality indicator is M*'s Economic Moat, a proprietary data point that reflects the strength and sustainability of a company's competitive advantage. A wide moat company is positioned to sustain economic profits for at least 20 years, whereas a narrow moat company can do so for at least 10 years.

S&P provides Credit Ratings to help investors determine investment risks. Ratings are either investment grade (AAA through BBB–) or speculative (BB+ through D).

The final quality indicator is the Dividend Safety Scores provided by SSD. Scores range from 0 to 100 and are based on more than a dozen fundamental metrics that influence the ability of companies to continue paying dividends:

Dividend Safety Scores

Source: Simply Safe Dividends

Here is the scoring system used to compile Quality Snapshots:

Scoring system used to compile Quality Snapshots

Source: Created by the Author (DVK Quality Snapshots)

Generally, 5 points are assigned to the highest ranks and best ratings, so the highest quality stocks would get 5 points on every factor for a maximum score of 25. Some of the quality indicators do not map to every point in the scoring system.

For example, M*'s economic moat rating distinguishes three kinds: Wide Moat, Narrow Moat, and No Moat. The scoring system assigns 5 points for Wide Moat, 4 points for Narrow Moat, and 2 points for No Moat. DVK does not penalize companies with no moats because "some companies can still succeed simply based on customer preferences."

For S&P credit ratings, points are only awarded for investment-grade stocks. A stock gets either 5, 4, 3, or 0 depending on its credit rating, or 0 if it doesn't have a credit rating. Some stocks do not have credit ratings, including stocks with no or little debt. In such cases, the scoring system assigns 3 points to stocks with a Debt/Capital of less than 10%.

The Screening Process

Similar to the approach taken by DVK in last year's article, I screened for the highest-quality stocks by only considering stocks that appear in the top two scoring categories of all five quality indicators. However, I used Dividend Radar as my universe of DG stocks, rather than the Dividend Champions, Contenders, and Challengers (CCC) list, which now requires e-mail registration to access.

The image below highlights the two levels used to select the highest-quality stocks for this article:

highest-quality dividend stocks
Source: Created by the Author, following DVK's June 2020 article.

The top-scoring stocks received 5 points for every quality indicator, earning the maximum score of 25 points. The lowest qualifying stocks received 4 points for every quality indicator, for a total of 20 points.

Key Metrics and Fair Value Estimates

Below, I'm presenting tables for each qualifying score (25 points down to 20 points). Stocks are presented in rank order.

Each table presents key metrics of interest to DG investors. These include the dividend increase streak (Years), the dividend Yield for a recent share Price, and the 5-year dividend growth rate (5-Yr DGR). The Chowder Number (CDN) and 5-year Yield on Cost (5-Yr YoC) are measures of a stock’s future total return and dividend income prospects, while the 5-year trailing total returns (5-Yr TTR) is a measure of the stock’s performance over the past five years.

I also provide the five quality indicators used in determining each stock's quality score (Qual), as well as my Fair Value estimate to help identify stocks that trade at favorable valuations. The discount/premium column (–Disc/+Prem) shows the discount or premium of a recent share price to my fair value estimates.

Color-coding

The stocks I own in my DivGro portfolio are highlighted in the ticker column.

The 5-yr YoC column is colored green for yields ≥ 4.0%, yellow for yields ≥ 2.5% (but less than 4.0%), and red for yields < 2.5%.

I color-code the CDN column by the likelihood of each stock to deliver annualized returns of 8%, according to the Chowder Rule. Green means likely, yellow means less likely, and red means unlikely.

The price column is colored green for stocks trading below my fair value estimate.

Stocks Scoring 25 Points

This elite group of stocks earned the top scores for every quality indicator, scoring a perfect 25 out of 25 points. I rate these stocks Exceptional.

Rank Company (Ticker) Sector Supersector
1 Johnson & Johnson (JNJ) Health Care Defensive
2 Microsoft (MSFT) Information Technology Sensitive
3 Procter & Gamble (PG) Consumer Staples Defensive
4 NIKE (NKE) Consumer Discretionary Cyclical
5 Visa (V) Information Technology Sensitive
6 Automatic Data Processing (ADP) Information Technology Sensitive
7 Accenture plc (ACN) Information Technology Sensitive

Note that JNJ and MSFT are the only stocks with AAA credit ratings.

Two stocks are new to this group since the June 2020 article, ACN, and ADP, while one stock dropped out of this group, Merck (MRK), due to a lower credit rating.

Stocks Scoring 24 Points

The stocks in the second group missed a perfect score by missing out on just one of the quality indicators. This is evident in the table, where a lighter color green appears instead of dark green. I rate stocks with quality scores of 23-24, Excellent.

Rank Company (Ticker) Sector Supersector
8 Apple (AAPL) Information Technology Sensitive
9 Merck (MRK) Health Care Defensive
10 Costco (COST) Consumer Staples Defensive
11 Mastercard (MA) Information Technology Sensitive
12 Medtronic plc (MDT) Health Care Defensive
13 Honeywell International (HON) Industrials Sensitive
14 General Dynamics (GD) Industrials Sensitive
15 CME Group (CME) Financials Cyclical
16 Intel (INTC) Information Technology Sensitive
17 Eli Lilly (LLY) Health Care Defensive
18 PepsiCo (PEP) Consumer Staples Defensive
19 Cisco Systems (CSCO) Information Technology Sensitive
20 Texas Instruments (TXN) Information Technology Sensitive
21 Stryker (SYK) Health Care Defensive
22 Union Pacific (UNP) Industrials Sensitive
23 The Home Depot (HD) Consumer Discretionary Cyclical
24 Lockheed Martin (LMT) Industrials Sensitive
25 Walmart (WMT) Consumer Staples Defensive

Stocks Scoring 23 Points

These stocks missed the highest rating level on two quality indicators. I rate stocks with quality scores of 23-24, Excellent.

Rank Company (Ticker) Sector Supersector
26 UnitedHealth Group (UNH) Health Care Defensive
27 BlackRock (BLK) Financials Cyclical
28 Ecolab (ECL) Materials Cyclical
29 Air Products and Chemicals (APD) Materials Cyclical
30 Hershey (HSY) Consumer Staples Defensive
31 Comcast (CMCSA) Communication Services Sensitive
32 Illinois Tool Works (ITW) Industrials Sensitive
33 Coca-Cola (KO) Consumer Staples Defensive
34 Bristol-Myers Squibb (BMY) Health Care Defensive
35 Emerson Electric (EMR) Industrials Sensitive
36 Pfizer (PFE) Health Care Defensive
37 3M (MMM) Industrials Sensitive
38 Amgen (AMGN) Health Care Defensive
39 Raytheon Technologies (RTX) Industrials Sensitive

Stocks Scoring 22 Points

The stocks in this group missed the highest rating level on three quality indicators. I rate stocks with quality scores of 19-22, Fine.

Rank Company (Ticker) Sector Supersector
40 W.W. Grainger (GWW) Industrials Sensitive
41 Hormel Foods (HRL) Consumer Staples Defensive
42 Chubb (CB) Financials Cyclical
43 NextEra Energy (NEE) Utilities Defensive
44 Cummins (CMI) Industrials Sensitive
45 Intuit (INTU) Information Technology Sensitive
46 Atmos Energy (ATO) Utilities Defensive
47 Caterpillar (CAT) Industrials Sensitive
48 Pinnacle West Capital (PNW) Utilities Defensive
49 Kimberly-Clark (KMB) Consumer Staples Defensive
50 WEC Energy Group (WEC) Utilities Defensive
51 Baxter International (BAX) Health Care Defensive
52 American Electric Power (AEP) Utilities Defensive
53 The Travelers Companies (TRV) Financials Cyclical
54 Abbott Laboratories (ABT) Health Care Defensive
55 United Parcel Service (UPS) Industrials Sensitive

Stocks Scoring 21 Points

These stocks earned the highest rating on just one of the five quality indicators. I rate stocks with quality scores of 19-22, Fine.

Rank Company (Ticker) Sector Supersector
56 Snap-on (SNA) Industrials Sensitive
57 Xcel Energy (XEL) Utilities Defensive
58 Aon Plc (AON) Financials Cyclical
59 Marsh & McLennan (MMC) Financials Cyclical

Stocks Scoring 20 Points

This group failed to earn the highest rating on all five quality indicators. I rate stocks with quality scores of 19-22, Fine.

Rank Company (Ticker) Sector Supersector
60 Franklin Resources (BEN) Financials Cyclical

Stocks that Failed the S&P Credit Rating

In DVK's June 2020 article, he included a bonus section containing stocks that failed the credit rating screen. Specifically, DVK wrote:

Because credit rating is so often the problem factor for companies that otherwise score highly for quality, I am presenting here the companies that made it through other screens, but either had a low investment-grade credit rating (BBB range) or have no credit rating from S&P.

For the latter, I show the company's long-term debt/capital ratio, sourced from FASTGraphs. If that is 10% or greater, the company gets 0 points on the S&P Credit factor.

For the sake of comparison, I include a similar table here.

Stocks that Failed the S&P Credit Rating

# Company (Ticker) Sector Supersector
1 Public Service Enterprise Group (PEG) Utilities Defensive
2 Oracle (ORCL) Information Technology Sensitive
3 Roper Technologies (ROP) Industrials Sensitive
4 T. Rowe Price Group (TROW) Financials Cyclical
5 Lowe's Companies (LOW) Consumer Discretionary Cyclical
6 Becton, Dickinson, and Co (BDX) Health Care Defensive
7 Verizon Communications (VZ) Communication Services Sensitive
8 Northrop Grumman (NOC) Industrials Sensitive
9 American Express (AXP) Financials Cyclical
10 McDonald's (MCD) Consumer Discretionary Cyclical
11 Starbucks (SBUX) Consumer Discretionary Cyclical
12 PPG Industries (PPG) Materials Cyclical
13 Dover (DOV) Industrials Sensitive
14 J.B. Hunt Transport Services (JBHT) Industrials Sensitive
15 McKesson (MCK) Health Care Defensive
16 Sherwin-Williams (SHW) Materials Cyclical
17 Norfolk Southern (NSC) Industrials Sensitive
18 IDACORP (IDA) Utilities Defensive
19 McCormick & Company (MKC) Consumer Staples Defensive
20 Kellogg (K) Consumer Staples Defensive
21 Analog Devices (ADI) Information Technology Sensitive
22 International Flavors & Fragrances (IFF) Materials Cyclical
23 ITT (ITT) Industrials Sensitive
24 Danaher (DHR) Health Care Defensive
25 FedEx (FDX) Industrials Sensitive
26 Nasdaq (NDAQ) Financials Cyclical
27 L3Harris Technologies (LHX) Industrials Sensitive
28 Tractor Supply (TSCO) Consumer Discretionary Cyclical
29 New Jersey Resources (NJR) Utilities Defensive

Other Stocks that Scored at least 20 Points

Here is another bonus section, this time listing stocks that scored at least 20 total points but otherwise failed our stringent quality screens. I'm excluding stocks presented in the previous bonus section.

# Company (Ticker) Sector Supersector
1 Colgate-Palmolive (CL) Consumer Staples Defensive
2 Brown-Forman (BF.B) Consumer Staples Defensive
3 Canadian National Railway (CNI) Industrials Sensitive
4 Toronto-Dominion (TD) Financials Cyclical
5 Commerce Bancshares (CBSH) Financials Cyclical
6 Cintas (CTAS) Industrials Sensitive
7 Intercontinental Exchange (ICE) Financials Cyclical
8 Landstar System (LSTR) Industrials Sensitive
9 Arthur J. Gallagher (AJG) Financials Cyclical
10 Clorox (CLX) Consumer Staples Defensive
11 Waste Management (WM) Industrials Sensitive
12 SAP SE (SAP) Information Technology Sensitive
13 Linde plc (LIN) Materials Cyclical
14 Brown & Brown (BRO) Financials Cyclical
15 American States Water (AWR) Utilities Defensive
16 W. R. Berkley (WRB) Financials Cyclical
17 Dolby Laboratories (DLB) Information Technology Sensitive
18 Lancaster Colony (LANC) Consumer Staples Defensive
19 Archer-Daniels-Midland (ADM) Consumer Staples Defensive
20 Globe Life (GL) Financials Cyclical
21 C.H. Robinson Worldwide (CHRW) Industrials Sensitive
22 Consolidated Edison (ED) Utilities Defensive
23 Amphenol (APH) Information Technology Sensitive
24 TE Connectivity (TEL) Information Technology Sensitive
25 Agilent Technologies (A) Health Care Defensive
26 PACCAR (PCAR) Industrials Sensitive
27 Old Dominion Freight Line (ODFL) Industrials Sensitive
28 Allstate (ALL) Financials Cyclical
29 Rockwell Automation (ROK) Industrials Sensitive
30 Gilead Sciences (GILD) Health Care Defensive
31 Mondelez International. (MDLZ) Consumer Staples Defensive
32 International Business Machines (IBM) Information Technology Sensitive
33 JPMorgan Chase (JPM) Financials Cyclical

Concluding Remarks

The DVK Quality Snapshots scoring system provides an elegant and effective way to assess the quality of DG stocks.

In this article, I updated the June 2020 article published by David Van Knapp, which identified 57 stocks that passed the stringent screens to identify the highest quality DG stocks. In that article, six DG stocks earned perfect scores. In comparison, this update identifies 60 DG stocks, with seven DG stocks earning perfect scores.

Most of the stocks identified in this article are high-quality DG stocks. The universe is 762 DG stocks in the latest Dividend Radar (published: July 30, 2020), whereas I presented 60 + 29 + 33 = 122 DG stocks today (or 16.0% of all Dividend Radar stocks).

Quality is not the only factor to consider when selecting candidates for investment. Other factors to investigate include a stock's valuation, total return, dividend income, and growth prospects. To assist readers, the tables in this article provide the key metrics and my fair value estimates.

As always, I recommend doing your own due diligence before investing in any stock covered in this article.

Finally, I'd like to thank David Van Knapp for developing and sharing his Quality Snapshots scoring system with the DG Investing community. David hasn't published articles on Seeking Alpha since December 2020, but I know he still visits the site, as evidenced by occasional comments.

A reader requested a 2021 version of this (June 2020 article) "masterpiece," but David said he couldn't do it, as he's tied up with other projects. David kindly recommended my work, after which I decided to write this update. I certainly hope it does justice to David's seminal work!

David's stated mission is to help self-directed individual investors profit from stock investing, and he has certainly helped me tremendously! He wrote a great book on Dividend Growth Investing, which you can learn about here. Check it out!

Thanks for reading, and happy investing!

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/we have a beneficial long position in the shares of JNJ, MSFT, PG, NKE, V, ADP, ACN either through stock ownership, options, or other derivatives. 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: In my DivGro portfolio, I'm long: AAPL, ABBV, ACN, ADM, ADP, AFL, ALL, AMGN, AMZN, ANTM, APD, ATO, AVGO, AWR, BEN, BLK, BMY, BNS, CB, CMCSA, CMI, CNI, COST, CRM, CSCO, CVS, CVX, DBX, DHI, DIS, DLR, ETO, EVT, FDX, GD, GILD, GOOG, HD, HON, HRL, IBM, ICE, INTC, ITW, JNJ, JPM, KO, LMT, LOW, MA, MAIN, MCD, MDT, MMM, MO, MRK, MSFT, NEE, NFLX, NIE, NKE, NNN, NOC, O, OGN, ORCL, PEG, PEP, PFE, PG, PINS, PM, PNW, PSA, QCOM, RTX, RY, SBUX, SNA, SRE, SYK, T, TD, TJX, TROW, TRV, TSM, TSN, TXN, UNH, UNP, UPS, V, VLO, VZ, WPC, XEL

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