V - 10 Dividend Growth Stocks - April 2023

2023-04-17 11:17:22 ET

Summary

• This monthly series ranks a selection of dividend growth stocks in Dividend Radar and presents the ten top-ranked stocks for consideration.
• To rank stocks, I sort them in descending order by quality score and break ties using additional metrics.
• This month I ranked undervalued stocks with high compound annual growth rates.

Dividend Radar is a weekly automatically generated spreadsheet of more than 700 dividend growth stocks [DG] with dividend increase streaks of five or more years. Every month, I rank a selection of Dividend Radar stocks and present the ten top-ranked stocks for further research and possible investment.

I rank stocks by sorting them in descending order by quality score and using tie-breaking metrics where necessary. My quality scoring system employs widely used quality indicators from independent sources to assess the quality of DG stocks.

This month I decided to rank undervalued Dividend Radar stocks with high compound annual growth rates [CAGRs]. My CAGR screen blends 5-year CAGRs for dividends, earnings per share, and total revenue, requiring a blended 5-year CAGR of at least 10%. My valuation screen finds DG stocks trading below my fair value estimate.

Screening and Ranking

The latest Dividend Radar (dated April 14, 2023) contains 733 DG stocks.

I screened these DG stocks using a CAGR screen and a valuation screen. The CAGR screen found 224 candidates, while the valuation screen found 619 candidates. When combining these screens, 106 candidates made the cut.

The CAGR Screen

Two important metrics of Dividend Growth Investing are the stock's dividend yield and the dividend growth rate. The yield indicates how much dividend income the investor can expect, while the growth rate indicates how fast the dividend has grown (or might grow) over time.

In The February edition of my 10 Dividend Growth Stocks series, I used a yield-related screen by requiring a forward dividend yield of at least 4%. This month, I wanted to use a growth rate-related screen to look for growth rates of at least 10%.

Rather than using only the dividend growth rate, I decided to blend 5-year CAGRs for dividends, earnings per share, and total revenue.

Here's the screen:

CAGR Screen: average(minimum(D,E,R),median(D,E,R)) ? 10%

where:

• D = 5-year dividend growth rate

• E = 5-year earnings growth rate

• R = 5-year revenue growth rate

Blending the three 5-year CAGRs in this way gives a conservative projection of future growth. Essentially, the blending formula ignores the highest of the CAGRs and averages the lowest and middle CAGR.

Only blended 5-year CAGRs of 10% or above qualify.

The Valuation Screen

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.

Here's the screen:

Valuation Screen: Price < FV

Stocks trading below my FV estimate are undervalued candidates.

Ranking by Quality

As mentioned earlier, 106 candidates pass both of this month's screens. I sorted these candidates in descending order by their quality scores and used the following tie-breakers to rank them:

• Dividend Safety Scores (from Simply Safe Dividends)
• Credit Ratings (from S&P Global)
• Forward Dividend Yield

Each stock's Rank is shown in the tables that follow.

Top 10 Dividend Growth Stocks for April

Here are this month's ten top-ranked DG stocks in rank order:

I own the highlighted stocks in my DivGro portfolio .

The following company descriptions are my summary of company descriptions sourced from Finviz.

1. Visa

Headquartered in San Francisco, California, V operates as a payments technology company worldwide. The company facilitates commerce through the transfer of value and information among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. V provides its services under the Visa, Visa Electron, Interlink, V PAY, and PLUS brands.

2. Accenture plc

Founded in 1989 and based in Dublin, Ireland, ACN provides management and technology consulting services to clients in various industries and geographic regions, including North America, Europe, and Growth Markets. ACN’s operating segments are Communications, Media & Technology; Financial Services; Health and Public Service; Products; and Resources.

3. Home Depot

Founded in 1978 and based in Atlanta, Georgia, HD is a home improvement retailer that sells an assortment of building materials, home improvement products, and lawn and garden products. HD provides installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me, and professional customers.

4. UnitedHealth

Founded in 1974 and based in Minnetonka, Minnesota, UNH is a diversified health and well-being company with core capabilities in clinical expertise, advanced technology, and data and health information. The company provides medical benefits to customers in the United States and in more than 125 other countries.

5. Mastercard

MA, a technology company, provides transaction processing and other payment-related products and services in the United States and internationally. The company offers payment solutions and services under the MasterCard, Maestro, and Cirrus brands. MA was founded in 1966 and is headquartered in Purchase, New York.

6. Intuit

INTU provides financial management and compliance products and services for consumers, small businesses, self-employed, and accounting professionals in the United States, Canada, and internationally. The company operates in three segments: Small Business & Self-Employed, Consumer, and Strategic Partner. INTU was founded in 1983 and is headquartered in Mountain View, California.

7. Franklin Electric

FELE designs, manufactures, and distributes water and fuel pumping systems worldwide. It operates in three segments: Water Systems, Fueling Systems, and Distribution. The company sells its products to specialty distributors, original equipment manufacturers, industrial and petroleum equipment distributors, and oil and utility companies. FELE was founded in 1944 and is headquartered in Fort Wayne, Indiana.

8. Lowe's

LOW is a home improvement retailer. The company offers a complete line of products for maintenance, repair, remodeling, and home decorating. It also offers installation services through independent contractors, as well as extended protection plans and repair services. LOW was founded in 1946 and is based in Mooresville, North Carolina.

9. Texas Instruments

TXN designs, manufactures, and sells semiconductors to electronics designers and manufacturers globally. The company operates in two segments, Analog, and Embedded Processing. It markets and sells semiconductor products through a direct sales force and through distributors, as well as through its website. TXN was founded in 1930 and is headquartered in Dallas, Texas.

10. Bristol-Myers Squibb

BMY discovers, develops, licenses, manufactures, markets, distributes, and sells biopharmaceutical products worldwide. The company's pharmaceutical products include chemically synthesized drugs administered as tablets or capsules. It also uses biologics to produce products administered through injections or by infusion. BMY was founded in 1887 and is headquartered in New York, New York.

Please note that the top ten DG stocks are candidates for further analysis, not recommendations.

Key Metrics and Fair Value Estimates

Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates:

• Yrs : years of consecutive dividend increases

• Qual : Quality score out of 30

• 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-EGR : 5-year compound annual growth rate of EPS

• 5-RGR : 5-year compound annual growth rate of revenue

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

• ACN : Adjusted Chowder Number

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

• VL PS : Value Line Price Stability

• VL FS : Value Line Financial Strength ratings

• MS EM : Morningstar Economic Moat

• SP CR : S&P Global Credit Ratings

• SS DS : Simply Safe Dividends Dividend Safety Scores

• PI DG : Portfolio Insight Dividend Quality Grades

• FV : my fair value estimate

• –Disc +Prem : discount or premium of Price to FV

• Price : recent share price

Commentary

From a price-performance perspective, the portfolio would have outperformed the S&P 500 (as represented by the SPDR S&P 500 Trust ETF (SPY)) over the last five years, returning 97% versus SPY's 56%. Eight stocks have fair value upsides, according to Finbox.com.

BMY (3.24%), HD (2.86%),and TXN (2.77%) offer the highest forward yields and are candidates for Income Investors.

INTU (18%) and HD (16%)have the highest ACNs, so these stocks have the best total return prospects of this month's stocks.

UNH (20.9%), INTU (20.7%), MA (18.7%), and LOW (18.6%) have the highest 5-year TTRs.

Only two stocks (HD and BMY) pass all five of my stock selection criteria for adding new positions to my DivGro portfolio:

1. Stock Quality : Quality scores > 20 ( Exceptional , Excellent , or Fine ratings)
2. Stock Valuation : Price ? FV (trades below my fair value estimate)
3. Growth Outlook : Qualifying ACNs (likely to deliver annualized returns of 8%)
4. Income Outlook : 5-year YoC ? 4.00% (likely to have high YoCs after 5 years of ownership)
5. Dividend Quality : A+ or A Dividend Quality Grades

Concluding Remarks

In this article, I ranked Dividend Radar stocks that passed two screens. The first screen requires a blended 5-year CAGR of at least 10% . The second screen finds discounted stocks trading below my FV estimate.

I own eight of the ten top-ranked stocks this month.

HD and BMY look interesting to me as they offer reasonable yields in addition to high blended 5-year CAGRs.

As always, I encourage readers to do their due diligence before buying any stocks I cover

Thanks for reading, and take care, everybody!

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