The Highest Quality Dividend Growth Stocks In 2022

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FerdiS
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Summary

  • This article updates one I wrote in August 2021 based on a template article by David Van Knapp, written 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.
  • This year, 56 companies made it through the stringent quality screens, and eight companies have perfect quality scores.
  • I provide two bonus lists, 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 the quality screens.

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I adopted the DVK Quality Snapshots in 2019 after reading this article by David Van Knapp on high-quality, high-yield DG stocks. This simple yet elegant system provides a quick way to assess the quality of dividend growth [DG] stocks. It employs five widely used quality indicators from independent sources and assigns 0-5 points to each quality indicator, for a maximum of 25 points.

In this article, I deploy DVK Quality Snapshots to find the highest quality DG stocks in Dividend Radar, an automatically-generated spreadsheet of DG stocks (trading on US exchanges) with dividend increase streaks of at least five years. I'm using the same stringent screens DVK used in this June 2020 article and in my update in August 2021.

It is informative to see how the quality scores of DG stocks have changed over the past year.

Quality Scoring

In devising DVK Quality Snapshots, DVK decided to consult widely-used and trusted sources that rate or rank various factors related to quality: Value Line, Morningstar, S&P Global, and Simply Safe Dividends.

He selected the following quality indicators to determine each stock's quality score:

Readers can learn more about each quality indicator by clicking on the links.

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

In nine steps, VL also provides Financial Strength ratings, from A++ to C. To assign ratings, VL considers factors such as balance sheet strength, corporate performance, market capitalization, and stability of returns.

The following 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 can sustain its competitive advantage 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 SSD's Dividend Safety Scores, which are based on more than a dozen fundamental metrics that influence the ability of companies to continue paying dividends:

Dividend Safety Scores and the likelihood of dividend cuts in each category

Simply Safe Dividends

Here is the scoring system used to compile DVK Quality Snapshots:

A table listing points assigned ranks, ratings, and scores per quality indicator

Created by the author to explain the DVK Quality Snapshots scoring system

Generally, 5 points are assigned to the highest ranks and best ratings so that the highest quality stocks would get 5 points on every factor for a maximum score of 25 points.

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%.

Highest Quality

To screen for the highest quality DG stocks, I'm following DVK's lead in considering only stocks that appear in the top two scoring categories of all five quality indicators, as illustrated in the following image:

A table highlighting the top two scoring categories of DVK Quality Snapshots

Created by the Author, following DVK's June 2020 article

The top-scoring stocks received 5 points for every quality indicator, for a 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 and the DVK Quality Snapshots quality indicators.

  • Yrs: years of consecutive dividend increases

  • Adj Qual: DVK Quality Snapshots quality score

  • Fwd Yield: forward dividend yield for a recent share Price

  • 5-Avg Yield: 5-year average dividend yield

  • 5-DGR: 5-year compound annual growth rate of the dividend

  • 5-YOC: the projected yield on cost after five years of investment

  • C#: Chowder Number, a popular metric for screening dividend growth stocks

  • 5-TTR: 5-year compound trailing total returns

  • Buy Below: my risk-adjusted buy below price

  • -Disc +Prem: discount or premium of the recent share Price to my Buy Below price

  • Price: recent share price

Color-coding

  • Ticker: highlighted for stocks I own in my DivGro portfolio

  • Adj Qual: for color scheme, see DVK Quality Snapshots

  • Fwd Yield: green if Fwd Yield5-Avg Yield

  • 5-YOC: green if 5-YOC ≥ 4.0%, yellow if 5-YOC ≥ 2.5% (but less than 4.0%), and red if 5-YOC < 2.5%

  • C#: colored based on the likelihood of delivering annualized returns of 8%, according to the Chowder Rule: green means likely, yellow means less likely, and red means unlikely

  • Price: green if PriceBuy Below

I use a survey approach to estimate fair value [FV], collecting fair value estimates and price targets from several online sources such as Morningstar, Finbox, and Portfolio Insight. Additionally, I estimate fair value using each stock's five-year average dividend yield. With up to 11 estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my FV estimate.

My risk-adjusted Buy Below prices allow premium valuations for the highest-quality stocks but require discounted valuations for lower-quality stocks:

Table indicating how I determine risk-adjusted Buy Below prices

Created by the author

My Buy Below prices recognize that the highest-quality stocks rarely trade at discounted valuations. As a dividend growth investor with a long-term investment horizon, I'm more interested in owning quality stocks than getting a bargain on lower-quality stocks.

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.

Key metrics and fair value estimates of DG stocks with a quality score of 25, rated Exceptional

Created by the author from a personal spreadsheet

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
8 Walmart (WMT) Consumer Staples Defensive

WMT is new to this group after an upgrade to its SSD Dividend Safety Score.

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 green replaces the darker green. I rate stocks with quality scores of 22-23, Excellent.

Key metrics and fair value estimates of DG stocks with a quality score of 24, rated Excellent

Created by the author from a personal spreadsheet

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

WMT was promoted, and Intel (INTC) was demoted (see below).

Two stocks dropped out altogether:

  • CME Group (CME), with its lower VL Financial Strength rating of A
  • Stryker (SYK), with its lower S&P Credit Rating of BBB+

Stocks Scoring 23 Points

These stocks missed the highest rating level on two quality indicators. As mentioned above, I rate stocks with quality scores of 22-23, Excellent.

Key metrics and fair value estimates of DG stocks with a quality score of 23, rated Excellent

Created by the author from a personal spreadsheet

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

There are two additions to this group. INTC got demoted into this group after its SSD Dividend Safety Score changed from Very Safe to Safe. ABT got promoted into this group after it earned a higher S&P Credit Rating.

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.

Key metrics and fair value estimates of DG stocks with a quality score of 22, rated Fine

Created by the author from a personal spreadsheet

Rank Company (Ticker) Sector Supersector
39 Hormel Foods (HRL) Consumer Staples Defensive
40 Chubb (CB) Financials Cyclical
41 NextEra Energy (NEE) Utilities Defensive
42 Intuit (INTU) Information Technology Sensitive
43 Atmos Energy (ATO) Utilities Defensive
44 Caterpillar (CAT) Industrials Sensitive
45 Globe Life (GL) Financials Cyclical
46 WEC Energy (WEC) Utilities Defensive
47 American Electric Power (AEP) Utilities Defensive
48 Travelers (TRV) Financials Cyclical
49 United Parcel Service (UPS) Industrials Sensitive
50 Analog Devices (ADI) Information Technology Sensitive

The following stocks are new additions to this group:

  • GL got added after it M* Economic Moat improved to Narrow
  • ADI got added after its S&P Credit Rating improved to A-

ABT got promoted out of this group, while Cummins (CMI) and W.W. Grainger (GWW) got demoted (see below).

Three stocks dropped out altogether:

  • Baxter International (BAX), with a lower S&P Credit Rating of BBB
  • Kimberly-Clark (KMB), with a lower VL Financial Strength of A
  • Pinnacle West Capital (PNW), after reductions in its VL Financial Strength and S&P Credit Rating.

Stocks Scoring 21 Points

These stocks earned the highest rating on just one of the five quality indicators.

Key metrics and fair value estimates of DG stocks with a quality score of 21, rated Fine

Created by the author from a personal spreadsheet

Rank Company (Ticker) Sector Supersector
51 W.W. Grainger (GWW) Industrials Sensitive
52 Snap-on (SNA) Industrials Sensitive
53 Cummins (CMI) Industrials Sensitive
54 Xcel Energy (XEL) Utilities Defensive
55 Aon plc (AON) Financials Cyclical
56 Marsh & McLennan (MMC) Financials Cyclical

There are two additions to this group. GWW got demoted into this group after its VL Financial Strength rating dropped from A++ to A. Likewise, CMI got demoted into this group after its M* Economic Moat changed from Wide to Narrow.

Stocks Scoring 20 Points

Stocks in this group would have scored four points for each of the five quality indicators. However, there are no stocks that qualified in this way this year.

Last year, Franklin Resources (BEN) qualified in this group, but the stock's VL Safety Rank and VL Financial Strength rating deteriorated, so BEN dropped out of the list of highest-quality DG stocks this year.

Bonus: Stocks that Failed the S&P Credit Rating

In his June 2020 article, David Van Knapp included a bonus section containing stocks that failed the S&P Credit Rating screen but passed the stringent screens for this article. Stocks with a low investment-grade S&P Credit Rating (in the BBB range) or lacking an S&P Credit Rating but with a long-term debt/capital ratio less than 10% qualify here.

Key metrics and fair value estimates of DG stocks that failed the S&P Quality Rating but otherwise scored in the two top categories

Created by the author from a personal spreadsheet

# Company (Ticker) Sector Supersector
1 Stryker (SYK) Health Care Defensive
2 Public Service Enterprise (PEG) Utilities Defensive
3 Oracle (ORCL) Information Technology Sensitive
4 Roper Technologies (ROP) Information Technology Sensitive
5 T. Rowe Price (TROW) Financials Cyclical
6 Lowe's (LOW) Consumer Discretionary Cyclical
7 Becton, Dickinson (BDX) Health Care Defensive
8 McKesson (MCK) Health Care Defensive
9 Verizon Communications (VZ) Communication Services Sensitive
10 Sherwin-Williams (SHW) Materials Cyclical
11 Northrop Grumman (NOC) Industrials Sensitive
12 McDonald's (MCD) Consumer Discretionary Cyclical
13 Starbucks (SBUX) Consumer Discretionary Cyclical
14 PPG Industries (PPG) Materials Cyclical
15 Dover (DOV) Industrials Sensitive
16 J.B. Hunt Transport Services (JBHT) Industrials Sensitive
17 Norfolk Southern (NSC) Industrials Sensitive
18 Idacorp (IDA) Utilities Defensive
19 Baxter International (BAX) Health Care Defensive
20 McCormick (MKC) Consumer Staples Defensive
21 Kellogg (K) Consumer Staples Defensive
22 ITT (ITT) Industrials Sensitive
23 Danaher (DHR) Health Care Defensive
24 Franco-Nevada (FNV) Materials Cyclical
25 International Flavors & Fragrances (IFF) Materials Cyclical
26 Nasdaq (NDAQ) Financials Cyclical
27 L3Harris Technologies (LHX) Industrials Sensitive
28 Garmin (GRMN) Consumer Discretionary Cyclical

Bonus: 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.

Key metrics and fair value estimates of DG stocks that scored at least 20 points and are not in earlier sections

Created by the author from a personal spreadsheet

# Company (Ticker) Sector Supersector
1 CME (CME) Financials Cyclical
2 Colgate-Palmolive (CL) Consumer Staples Defensive
3 Brown-Forman (BF.B) Consumer Staples Defensive
4 Expeditors International of Washington (EXPD) Industrials Sensitive
5 Canadian National Railway (CNI) Industrials Sensitive
6 Intercontinental Exchange (ICE) Financials Cyclical
7 Commerce Bancshares (CBSH) Financials Cyclical
8 Cintas (CTAS) Industrials Sensitive
9 J&J Snack Foods (JJSF) Consumer Staples Defensive
10 Kimberly-Clark (KMB) Consumer Staples Defensive
11 Amphenol (APH) Information Technology Sensitive
12 Applied Materials (AMAT) Information Technology Sensitive
13 Arthur J. Gallagher (AJG) Financials Cyclical
14 Waste Management (WM) Industrials Sensitive
15 Linde plc (LIN) Materials Cyclical
16 Carlisle (CSL) Industrials Sensitive
17 Graco (GGG) Industrials Sensitive
18 Tootsie Roll Industries (TR) Consumer Staples Defensive
19 Brown & Brown (BRO) Financials Cyclical
20 American States Water (AWR) Utilities Defensive
21 Archer-Daniels-Midland (ADM) Consumer Staples Defensive
22 Chevron (CVX) Energy Sensitive
23 Consolidated Edison (ED) Utilities Defensive
24 TE Connectivity (TEL) Information Technology Sensitive
25 Agilent Technologies (A) Health Care Defensive
26 RLI (RLI) Financials Cyclical
27 Paccar Inc (PCAR) Industrials Sensitive
28 Old Dominion Freight Line (ODFL) Industrials Sensitive
29 Allstate (ALL) Financials Cyclical
30 Clorox (CLX) Consumer Staples Defensive
31 Thermo Fisher Scientific (TMO) Health Care Defensive
32 Rockwell Automation (ROK) Industrials Sensitive
33 Gilead Sciences (GILD) Health Care Defensive
34 Republic Services (RSG) Industrials Sensitive
35 Mondelez International (MDLZ) Consumer Staples Defensive

Concluding Remarks

The DVK Quality Snapshots scoring system provides an elegant and effective way to assess the quality of DG stocks. 119 /76

This article updates my August 2021 article in which 59 DG stocks passed the stringent quality screens, and seven DG stocks earned perfect scores. This update identifies 56 DG stocks and eight DG stocks earning perfect scores.

The stocks identified in this article are high-quality DG stocks, at least based on DVK Quality Snapshots. The universe is 730 DG stocks in the latest Dividend Radar (Published: August 5, 2022), whereas I presented 56 + 28 + 35 = 119 DG stocks today (or 16.3% of all Dividend Radar stocks).

Quality is not the only factor to consider when selecting candidates for investment. The stock's valuation is important, too. To assist readers, the tables in this article provide my risk-adjusted Buy Below prices and a column indicating by how much the stock's price is trading at a discount or premium to my Buy Below price.

No fewer than 76 of the DG stocks covered are trading below my Buy Below price!

Other factors to consider include dividend yield and growth rate, total return performance, and income and growth prospects. The tables provide some key metrics that should give readers a good start.

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

Thanks for reading, and happy investing!

This article was written by

FerdiS profile picture
26.16K 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 AAPL 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: Long: AAPL, ABBV, ACN, ADM, ADP, AFL, ALL, AMGN, AMT, AMZN, APD, ATO, AVGO, AWR, BLK, BMY, BNS, CB, CMCSA, CMI, CNI, COST, CRM, CSCO, CTAS, CVS, CVX, DLR, DTE, ELV, ENB, FDX, GD, GOOG, HD, HON, HRL, IBM, ICE, INTC, ITW, JNJ, JPM, KO, LMT, LOW, MA, MAIN, MCD, MDLZ, MDT, MMM, MO, MRK, MSFT, MUC, NEE, NFLX, NKE, NNN, NOC, O, ORCL, PCAR, PEG, PEP, PFE, PG, PM, PNW, PSA, QCOM, RTX, RY, SBUX, SNA, SRE, SYK, TD, TJX, TROW, TRV, TSN, TXN, UNH, UNP, UPS, V, VZ, WEC, WPC, XEL

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