TSCO - 10 Dividend Growth Stocks: December 2023

2023-12-29 09:00:00 ET

Summary

• In my monthly series of 10 Dividend Growth Stocks, I rank a selection of Dividend Radar stocks and present the ten top-ranked stocks for further research and possible investment.
• This month, I screened for stocks that pass stringent criteria for adding new stocks to my portfolio.
• I rank candidates by quality score and present the ten top-ranked stocks for further research and possible investment. These stocks are great candidates for your New Year shopping list!

Welcome to the December edition of my monthly series of 10 Dividend Growth Stocks !

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

Every month, I use different screens to highlight different aspects of dividend growth investing. This month, I'm presenting stocks that pass stringent criteria for adding new stocks to my portfolio.

Screening by My Selection Criteria for New Positions

I have stringent criteria for adding new stocks to my DivGro portfolio, which contains 71 dividend growth stocks, 4 dividend-paying stocks, 4 closed-end funds, and 1 non-dividend payer. With 80 different positions in my portfolio, only the very best candidates will convince me to add a new position.

Here are the criteria for adding new stocks to my portfolio:

1. Stock Quality : Quality scores ? 21 ( Exceptional , Excellent , or Fine ratings)
2. Stock Valuation : Price ? Buy Below (trades below my risk-adjusted Buy Below price)
3. Growth Outlook : Qualifying ACN s (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

The latest Dividend Radar (December 22, 2023) contains 709 DG stocks.

Of these:

• 224 have quality scores in the range of 21-30
• 187 trade below my risk-adjusted Buy Below price
• 177 have qualifying ACNs
• 287 likely will have YOCs of at least 4.00% after 5 years of ownership
• 170 have Dividend Quality Grades of A+ or A

When combining the screening results of each criterion, only six stocks survive! Since the Dividend Quality criterion is the most stringent, I added four stocks with Dividend Quality Grades of B+ to round out my list of 10 stocks.

The 10 Dividend Growth Stocks for December

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

The three stocks I own in my DivGro portfolio are highlighted. I previously owned BMY, EVRG, and BKH, but sold these stocks on 15 December for tax-loss harvesting purposes. I'll consider reopening positions in these stocks on 15 January 2024.

Stocks I added to round out the list to 10 stocks are marked with an asterisk (*).

The Dividend Quality Grade of BMY is B, whereas AEP, EVRG, and LHX have Dividend Quality Grades of B+. Note that BMY and AEP rank higher than the six candidates that pass my five selection criteria and have Dividend Quality Grades of A+ or A.

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

1. Bristol-Myers Squibb ((BMY))

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.

2. American Electric Power ((AEP))

AEP is a public utility holding company that engages in the generation, transmission, and distribution of electricity to customers in the United States. The company generates electricity using coal and lignite, natural gas, nuclear, hydroelectric, and other energy sources. AEP was founded in 1906 and is headquartered in Columbus, Ohio.

3. Tractor Supply ((TSCO))

Founded in 1938 and headquartered in Brentwood, Tennessee, TSCO operates retail farm and ranch stores in the United States. The company focuses on supplying the lifestyle needs of recreational farmers and ranchers, as well as tradesmen and small businesses. TSCO operates the retail stores under the names: Tractor Supply Company, Orscheln Farm & Home, and Petsense.

4. NextEra Energy ((NEE))

NEE generates, transmits, distributes, and sells electric power to retail and wholesale customers in North America. The company generates electricity through wind, solar, nuclear, coal, and natural gas facilities. It also develops, constructs, and operates assets focused on renewable energy generation. NEE was founded in 1925 and is based in Juno Beach, Florida.

5. Eversource Energy ((ES))

Formerly known as Northeast Utilities, ES is a utility holding company engaged in the generation, transmission, and distribution of electricity and natural gas. The company serves residential, commercial, and industrial customers in Connecticut, Massachusetts, and New Hampshire. Eversource Energy was founded in 1927 and is based in Springfield, Massachusetts.

6. Sempra Energy ((SRE))

SRE, an energy-services holding company, develops energy infrastructure, operates utilities, and provides related services. Operating through eight principal subsidiaries, the company serves customers in the United States, Canada, Mexico, South America, Europe, and Asia. SRE was founded in 1998 and is headquartered in San Diego, California.

7. Enterprise Products Partners ((EPD))

Founded in 1968 and based in Houston, Texas, EPD provides midstream energy services to producers and consumers of natural gas, natural gas liquids, crude oil, petrochemicals, and refined products. EPD operates through four segments: NGL Pipelines & Services; Crude Oil Pipelines & Services; Natural Gas Pipelines & Services; and Petrochemical & Refined Products Services.

8. Evergy ((EVRG))

Headquartered in Kansas City, Missouri, EVRG supplies electricity through two operating subsidiaries, Kansas City Power & Light Company (KCP&L) and Westar Energy. The company owns, operates, and maintains generation capacity and distribution lines and serves customers in Kansas and Missouri. EVRG was formed in 2018 by combining KCP&L and Westar Energy.

9. L3Harris Technologies ((LHX))

LHX, an aerospace and defense technology company, provides mission-critical solutions for government and commercial customers worldwide. The company operates in four segments: Integrated Mission Systems, Space and Airborne Systems, Communication Systems, and Aviation Systems. LHX was founded in 1895 and is headquartered in Melbourne, Florida.

10. Black Hills ((BKH))

Founded in 1941 and headquartered in Rapid City, South Dakota, BKH is a diversified energy company with operations in the United States. BKH's regulated utilities segments provide electricity to customers in South Dakota, Wyoming, Colorado, and Montana; and natural gas to customers in Colorado, Nebraska, Iowa, and Kansas.

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:

Valuation

To estimate fair value [FV], I collect FV estimates and price targets from several sources, including Portfolio Insight, Morningstar, and Finbox. I also estimate fair value using each stock's five-year average dividend yield. With up to 12 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:

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.

Commentary

Here's a comparative analysis of an equal-weighted portfolio of this month's top ten DG stocks, courtesy of Finbox.com:

From a price-performance perspective, the portfolio would have underperformed the S&P 500 (as represented by the SPDR S&P 500 Trust ETF [SPY]) over the last five years, returning 27% versus SPY's 91%. Based on analyst price targets, all but one of the stocks ((TSCO)) have positive upsides.

EPD has the highest forward yield of 7.62%, while EVRG , BMY , BKH , ES , and AEP all yield more than 4.00%. These are great candidates for income investors.

TSCO , LHX , BMY , and NEE have double-digit percentage projected DGRs and are great candidates for growth-oriented investors.

Only TSCO has a double-digit percentage TTR and is the only stock in this month's list that has outperformed SPY over the trailing 5-year period:

As for valuations, BMY (-28%), NEE (-18%), ES (-17%), and EVRG (-17%) are discounted most relative to my Buy Below prices and are great candidates for value investors.

Of the stocks I own in my DivGro portfolio, only NEE is an underweight position. Based on how I calculate target weights, I would need to add 31 shares of NEE to turn it into a full-sized position.

As mentioned earlier, I'll consider adding BMY, EVRG, and BKH back into my portfolio on 15 January 2024 after selling them for tax-harvesting purposes. Waiting until that date is necessary to abide by the Wash-Sale Rule , which specifies that investors cannot claim a taxable loss on a security if they repurchase it within 30 days after they've sold it.

ES and EPD are two stocks I don't own that pass all my stock selection criteria for adding new positions. I no longer invest in Master Limited Partnerships, as I don't like dealing with Schedule K-1 s when filing taxes.

I previously owned 200 shares of ES, but those got called away due to the assignment of two July 19, 2019, $70 covered calls. With ES now trading at $61.36, it appears to be a great time to reinvest. Both the P/E and Yield-based fair value charts from Portfolio Insight show ES to be significantly undervalued:

Portfolio Insight's 1-year target price of $84 gives ES a 1-year upside of 37%. And with a Non-GAAP payout ratio of 66% (low for Utilities), ES has plenty of room to continue paying and raising its dividend. I'll consider reopening a position in ES in the new year.

Concluding Remarks

This month, I screened Dividend Radar stocks for stocks that pass stringent criteria for adding new stocks to my portfolio. Only six stocks passed all five of my criteria, so I added four stocks by slightly easing the Dividend Quality Grade criterion.

I own three of this month's top-ranked stocks in my DivGro portfolio. I owned three more until 15 December but sold them for tax-loss harvesting purposes. I owned another stock on the list before, Eversource Energy, but my shares got called away in May 2019 at $70 per share after the assignment of two covered calls. I'm considering reinvesting in ES now that shares are trading below $62.

Based on your investment style, you may want to target the following stocks:

•For income investors: AEP , BKH , BMY , EPD, ES , and EVRG

• For value investors: BMY , ES , EVRG , and NEE

• For growth-oriented investors: BMY , LHX , NEE , and TSCO

• Based on past performance: TSCO

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

Thanks for reading, and happy investing!

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