Written by Nick Ackerman. This article was originally published to members of Cash Builder Opportunities on May 4th, 2022.
Dividend growth stocks aren't always the most exciting investments out there. They often times aren't grabbing the headlines; they aren't the stocks running up hundreds of percentages in a year. In fact, they are often some of the least exciting stocks. And that is precisely their strongest selling point. With such a vast world of dividend growth stocks available out there, it is important to screen through to see if there are any worthwhile investments to explore.
They are stocks that provide growing wealth over time to income investors. Dividend growers are often larger (not always), more financially stable companies that can pay out reliable cash flows to investors. Some are slower growers than others. Some are going to be cyclical that require a strong economy. Some are going to be secular, which doesn't generally rely on a more robust economy.
Dividend growth can promote share price appreciation. Of course, that is if these companies are growing their earnings to support such dividend growth in the first place. There are definitely yield-traps out there, trust me - I've owned a few that I'm not particularly proud of.
These dividend growth stocks can be even more critical in the current environment as it combats inflation. With the rising prices, an income investor needs a growing income to compensate for the price erosion. Inflation is now pushing over 8.5% in the U.S. Every time we've taken a look at this metric, it has been heading higher now. Which is why we have the Fed continuing to talk about raising rates.
Since our March update, the Fed has begun to raise rates to attempt to gain control of this runaway inflation. They are expecting to have to raise rates aggressively through the remainder of 2022.
I like to think of investing in dividend stocks as a perpetual loan of sorts. Essentially, every dividend is a repayment of your original capital. Eventually, holding long enough, you have the position "paid off." It is all return back into your pocket from that point forward.
All of this being said, it is important to understand my approach to dividend stocks and why screening of dividend stocks can be important for income investors. These are May's 5 dividend growth stocks that might be worthwhile for a deeper exploration. As is the case with any initial screening, this is just an initial dive - more due diligence would be necessary before pulling the trigger.
I'll be using some handy features that Seeking Alpha provides right here on their website for this screen. In particular, I will be screening utilizing their quant grades in dividend safety, dividend growth and dividend consistency.
Dividend Safety is relatively self-explanatory. These will be stocks that SA quants show reasonable safety compared to the rest of their various sectors. The grade considers many different factors but earnings payout ratios, debt and free cash flow are amongst these. This category will be stocks with A+ to B- ratings.
For the dividend growth category, we have factors such as the CAGR of various periods relative to other stocks in the same sector. Additionally, the quants also look at earnings, revenue and EBITDA growth. As we will see, this doesn't mean that every stock with a higher grade has the growth we are looking for. This just factors in that the dividend has grown or earnings are growing to support dividend growth possibly. For these, the grades will also be A+ through B- grades.
Finally, for dividend consistency, we want stocks that will be paying reliable dividends for us for a very long time. In particular, hopefully, they are raising year after year, though that isn't an explicit requirement. We will also include stocks with a general uptrend in dividend payments, which means that there could have been periods where they paused increases for a year or two.
After looking at those factors alone, we are left with 445 stocks at this time—an increase from April's 397 listings. I'll link the screen here, though it is a dynamic list that constantly updates regularly. When viewing this article, there could be more or less when going to the link.
From there, I wanted to narrow down the list a lot more obviously. I then sorted the list by forward dividend yield, highest to lowest. Since these will be safer dividend stocks in the first place, screening for those among the higher payers shouldn't hurt.
From there, I will share the top 25 that showed up as of 05/04/2022.
As usual, we have several repeats that we often see. If we covered them recently, we skip past them for this month.
ONEOK (OKE), Cogent Communications (CCOI), Philip Morris (PM) and Gilead Sciences (GILD) were all covered with March's screening. Ideally, we want to see a quarter go by before revisiting these names, despite how attractive they continue to remain.
We also have Urstadt Biddle Properties (UBA) and VICI Properties (VICI) that we covered last month. Both of these were names in previous updates as well that had reappeared. These are two REITs that some investors could consider investing in, as they remain solid dividend plays.
That leaves us with a couple of new names that we can explore. We have Moelis & Company (MC), Pinnacle West Capital (PNW), NorthWestern Corporation (NWE), Essential Properties Realty Trust (EPRT) and ALLETE Inc (ALE). MC, EPRT and ALE are new names that we haven't visited before in this series. PNW and NWE are both utilities we have run across before. Those two names, along with ALE, are utility operations. Utilities are always a favorite of mine as a dividend investor. EPRT is a REIT, so those always get me excited too.
We are going to skip past Deluxe Corporation (DLX). It could be a very worthy commercial printing company. However, we are looking more toward dividend growers. They haven't been upping their payout enough for what we really want to focus on here.
MC is a name I haven't run across before, but it operates as a financial sector stock in the investment banking and brokerage industry. The stock performance seems to have been rapidly declining since around November 2021. That isn't that unusual as that is when a lot of stocks began to peak and then run lower.
Historically though, it doesn't appear that this stock has a lot of appreciation potential going for it. The price is below where it was if we go back to 2018. So really, the returns here are in the form of the dividend. However, that isn't the entire story here until you start looking at their dividend history a bit more.
Unfortunately, they had cut their dividend in 2020 but had subsequently boosted it back up quickly. On top of this, their dividend history chart might look a bit confusing, but they have been paying out sizeable special dividends to investors. That's where the stock's appreciation could have been going to fund those payouts to shareholders rather than grow the business or retain the cash.
In 2021, they paid out an additional $4.50 in dividends. Even in 2020 - after they had cut their dividend - they paid another special of $2 in the fourth quarter. That was also paying a generous $0.75 in the first quarter of 2020 too. In 2019, they paid a $1.25 special over their regular quarterly. And then, in 2018, it was another $3 in special dividends above their quarterly.
In total, we have seen $11.50 in special dividends from this company from 2018 through 2021. Factoring those in, the share price could very well have been above the price it was trading at in 2018 if they had reinvested that capital or just held onto the cash. It is one of those things that we will never be able to go back and know.
Their latest earnings had them beating on both the top and bottom lines. Though analysts believe that they are slowing down as we go through 2022. With business slowing down, those specials might not be as common as they had been previously. That could cause the depreciation that we've seen in the name.
Overall, MC could be worth a deeper dive into. Keep in mind that it is a relatively smaller company with only around a $3.2 billion market cap.
PNW is an electric utility company with operations in Arizona. This is a position that we last touched on in February 2022. Most utilities are enjoying a relatively strong performance in 2022, thanks to being defensive plays.
PNW still seems a bit stuck as they were burdened with the Arizona regulators working against the company in 2021. That translated into analysts downgrading the stock. It had started to rebound more recently.
Despite that negativity, they had recently announced a beat on top and bottom lines when they released earnings. They had also reaffirmed 2022 guidance. They are expecting that EPS will be in the range of $3.90 to $4.10 per share. They added some more color to the quarter and on the topic of the rate case in the announcement.
The lower first-quarter results reflect the adverse outcome of the company’s recent general rate case. Implemented on Dec. 1, 2021, the unfavorable rate case decision was the primary driver for the lower quarter-over-quarter results. The largest contributing factor was discontinuation of the Four Corners and Ocotillo cost deferrals. Other major factors negatively affecting the 2022 first-quarter results were higher depreciation and amortization expense due to increased plant assets and higher income taxes. These negative effects were partially offset by higher customer usage and customer growth, increased transmission revenue and lower operations and maintenance expense.
“Despite the impact the rate decision had on our first-quarter revenue, 2022 has started off in line with our expectations during what we’ve previously expressed as a ‘financial reset year,’ ” said Pinnacle West Chairman, President and Chief Executive Officer Jeff Guldner. “Our employees contributed to strong operational performance, and we continue to serve one of the fastest-growing service territories in the nation. Our quarterly customer growth was a robust 2.2%, and we experienced stronger-than-projected sales growth of 4.4%.”
Despite this "reset," that didn't stop them from upping their dividend in Q4 2021 as they have historically done. I believe that PNW remains an interesting dividend play at this time.
We also touched on NWE in our February screening article. NWE is a multi-utility company. This is a fairly small operation, and its market cap is around $3.07 billion. They provide electricity and natural gas to customers in "Montana, South Dakota, Nebraska, and Yellowstone National Park."
This is a prime example of a slow and steady utility name. It hasn't done anything too exciting but continues just slowly to grow its healthy dividend over the years. They have 16 years of dividend growth under their belt. If you bought ten years ago, you would have some appreciation in the share price. However, if you bought over the last 7 or 8 years, you haven't moved much. For some investors, that is quite alright as it is more of a dividend play.
What is a bit interesting here is how heading into 2020, just how high the share price was able to get.
It would appear that on a more negative note, they had missed both EPS and revenue when they last announced their results back in April. Notably, revenue was slightly down from the prior year. That is something that you don't want to see happen too regularly, or eventually, you can run into a case of the dividend being unsustainable. The payout ratio currently comes to 74.55%. That might seem elevated, but for a utility isn't anything too surprising.
A new name to the list that we haven't previously covered is EPRT. This is a diversified REIT. Interestingly, it is another rather small operation with a portfolio of 451 properties and a market cap of $3.16 billion. It is sizeable enough, but when compared to other diversified REITs, it is smaller. We can look at names such as W. P. Carey (WPC), with a $15.58 billion market cap through 1,215 properties, and STORE Capital (STOR) is around a $7.94 billion market cap with 2,500 properties. Those can provide some context as to the size of EPRT.
Smaller size can mean faster growth, though. That appears to be what is happening, at least in terms of the dividend trend. EPRT and STOR come in rather close in terms of their growth. The largest REIT by market cap here is WPC, and they are seeing the least amount of growth in this period. The chart is looking back over the last three years.
When they last announced their earnings, it was a beat for FFO and revenue. In fact, revenue appears to have exploded higher. They had also increased their 2022 AFFO guidance range to $1.50 to $1.53.
EPRT seems to be one of those perfect positions that deserve a deeper look from investors.
Last but not least, we have ALE. This is another new name on the coverage list. This is another multi-utility name with electric, natural gas and water customers in Wisconsin and Minnesota. Though they list that they also "own and maintain electric transmission assets in Wisconsin, Michigan, Minnesota, and Illinois."
However, it doesn't stop there as they list that they are involved in a coal mining operation in North Dakota and also "real estate investment activities in Florida." The company was Minnesota Power at one time before changing its name to ALLETE in 2001.
This might seem like they are moving in many directions, but they actually are the parent company to five other subsidiaries.
One of the things that have put this stock under pressure more recently was a stock offering that they had in April. The offering seemed to be intended for an acquisition of a player in the solar energy space.
The Company intends to use the net proceeds from this offering for corporate purposes, including, without limitation, the payment of the purchase price for the acquisition of New Energy Equity as well as capital investments.
Any time there is a stock offering, there will be pressure on a stock price. We often see stock offerings from business development companies [BDCs] or REITs. Although, they can really come from any type of company.
The dividend from this company has been growing for 17 years now. The payout ratio comes in at 78.02%. Again, as a utility company, that isn't too high. However, it does help highlight why stock offerings might be necessary to pursue acquisitions. It is either that or taking on debt as an option to grow.
Overall, ALE is another interesting position that I believe could definitely be worthwhile to explore a bit deeper from this initial look.
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Cash Builder Opportunities provides high-quality and reliable dividend growth ideas to build growing income for investors. A special focus on investments that are leaders within their industry to provide stability and long-term wealth creation. Along with this, the service provides ideas for writing options to build investor's income even further.
Who are we?
Nick Ackerman is the lead author for Cash Builder Opportunities. Nick is an avid student of the markets and has been investing in his own accounts for over 12 years. He is a former Financial Advisor and has previously qualified for holding Series 7 and Series 66 licenses. These licenses also specifically qualified him for the role of Registered Investment Adviser (RIA), i.e., he was registered as a fiduciary and could manage assets for a fee and give advice. His specific focus is on closed-end funds, dividend growth stocks and option writing as an attractive way to achieve income as well as general financial planning strategies towards achieving one’s long-term financial goals.
Stanford Chemist is a scientific researcher by training who has taken up a strong and passionate interest in investing. His members appreciate the analytical and agenda-free insight and analysis that he brings to investments. He has developed his own metrics and tools for understanding closed-end funds and exchange-traded funds and how to profit from them and will seek to apply the same logical principles to Cash Builder Opportunities.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.