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Finding Undervalued Dividend Growth Stocks


You can find value in almost any market.

Finding quality dividend growth stocks is relatively straightforward.

If you remain disciplined in your strategy, you can see instant improvement in portfolio returns.

You will need to setup a dividend stock screener to find quality, undervalued dividend growth stocks. Using my dividend growth stock screener and criteria, you should find a handful of undervalued dividend growth stocks that will help you build a dividend growth stock portfolio. I like to use Finviz stock screener in particular. Finviz is a free tool that offers a nice selection of fundamental valuation options to screen undervalued dividend growth stocks.

Finding Undervalued Dividend Growth Stocks

No matter the market. There is value. You just have to go out there and find it. With that being said, how do you go out and find undervalued dividend growth stocks? First off, we LOVE dividend growth stocks due to the opportunity for long-term potential for capital appreciation. Dividend growth stocks are the single best way to combine a growth stock with consistent residual income. I love a good bargain and I certainly don’t mind bargain dividend stocks. I used the following steps to buy Target Corporation at a +5% yield. In addition, we purchased Boeing stock at $129.11 per share and the stock is now trading at $344.25. Use our dividend growth stock screener criteria below and you can improve the investment returns in your portfolio. This will help you to stop using ANNUAL DIVIDEND YIELD when making an investment decision.

Dividend Growth at a Reasonable Price (dGARP)

When finding undervalued dividend growth stocks, I like to call it the dGARP method. The dGARP method means “Dividend Growth at a Reasonable Price.” Finding Dividend Growth at a Reasonable Price (dGARP) stocks is an investment strategy that combines tenets of both dividend growth and value investing by finding companies that show consistent dividend AND earnings growth but don’t sell at inflated valuations. Traditional Growth at a Reasonable Price investors look for only earnings growth. I want to find the best dividend growth stocks for the right valuation. Using our dividend growth screener and criteria, I believe we can find a list of undervalued dividend growth stocks.

What criteria should I use to screen for undervalued dividend growth stocks?

Using the Finviz stock screener you can filter for stocks at a certain dividend yield, valuation, earnings growth and more. I like to use Finviz as a dividend growth screener since the platform is easy to understand and the criteria is very easy to filter. There are plenty of other stock screeners out there, so just use the Google machine to find one that you like.

Once you navigate to the stock screener on Finviz. Use the following criteria to screen for undervalued dividend growth stocks:

  1. Input dividend yield stocks greater than 0%. We only want stocks that pay a dividend.
  2. Market Capitalization of over $10bln. I only want companies with scale and a size advantage.
  3. We only want reasonably valued companies, so input P/E ratio less than 20x.
  4. I want to invest in companies that are growing their Earnings Per Share (“EPS”), so input EPS growth next year of greater than 5%.
  5. Long-term growth is important, so filter companies that are growing their EPS over the long-term. I input EPS growth next 5 years of greater than 5%.
  6. I don’t like to overpay for growth, so input Price to Earnings Growth (“PEG”) of less than 1.
    • This is one of the most uncertain criteria because the growth component is highly subjective. Here’s how to forecast the dividend growth rate. At the same time, this is also one of the most important criteria in screening for undervalued dividend growth stocks because we are trying to find stocks that combine both dividends and growth potential AT A REASONABLE PRICE.
    • The Price to Earnings Growth formula is typically used with Growth at a Reasonable Price (GARP) investors.
  7. Finally, I want dividend safety over the long-term. Use a payout ratio of less than 50%. This gives us a margin of safety. If EPS doesn’t grow, there is still sufficient dividend coverage.

Ok I have my list of dividend stocks… How do I interpret the results?

After you input all of the criteria identified above, you should have a list of stocks no more than 20-40 dividend growth stocks to evaluate further. I like to sort my list of stocks by lowest Price to Earnings ratio just to give me an understanding of the lowest priced stocks. Remember, a low Price to Earnings ratio does not always mean guaranteed success. A number of stocks with low Price to Earnings ratios are anticipated to have declining earnings growth.

Once you have your list of dividend stocks, filter through the list and choose the stocks that are easy to understand how they make money. We want companies that are easy to understand. This makes it much easier to understand the growth prospects and monitor industry trends relating to that particular company. Keep it simple stupid (KISS) applies here.

“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

-George Soros

Compare Dividend Growth Screener Results with Dividend Aristocrats Index

When you love a stock, you know it.

Compare Dividend Growth Screener Results with Dividend Aristocrats Index

To take it a step further, compare your list of stocks from the screener with the dividend aristocrat index. Dividend aristocrats are companies that have been increasing their dividend in consecutive years for more than 25 years. Retire Before Dad has the list of dividend aristocrats that you can use to compare to your findings. Dividend aristocrats are clearly stocks with consistent dividend growth. If you prefer to not invest in individual dividend growth stocks, you can build a dividend portfolio through global dividend growth funds. I’ve built a list of global dividend growth funds that will help you diversify your dividend portfolio.

Conclusion on Undervalued Dividend Growth Stocks

Once you have a selected list of undervalued dividend growth stocks. You are not done. You cannot just invest blindly in dividend stocks or growth stocks without further due diligence. Investing is both an art and a science, so take some time to listen to earnings calls or read industry reports before making your final decision.

Dividend or growth? Which is better for you? We believe both! Building a dividend growth stock portfolio can accomplish both of these goals. Use our primer on the short-form dividend discount model to build a dividend portfolio.

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