BMYMP - 10 Dividend Growth Stocks For October 2023

2023-10-26 00:58:27 ET

Summary

• In this series, I rank a selection of Dividend Radar stocks and present the ten top-ranked stocks for further research and possible investment.
• I screened for high-quality stocks with superior growth and income prospects this month. Additionally, I screened for stocks trading below my risk-adjusted Buy Below prices.
• Of the 713 Dividend Radar stocks, only 18 survived this month's stringent screens.
• I ranked these candidates by quality score and present the ten top-ranked stocks in this article.

Welcome to the October 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.

I use different monthly screens to highlight different aspects of dividend growth investing. This month, I screened for high-quality stocks with superior growth and income prospects and stocks trading below my risk-adjusted Buy Below prices. In my view, these stocks are excellent candidates for dividend growth investors.

I rank stocks by sorting them in descending order by quality score (out of 30 points) 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.

Screening and Ranking

The latest Dividend Radar (dated October 20, 2023) contains 713 DG stocks.

Of these, 224 are high-quality stocks with quality scores in the range of 21-30. As explained below, I screened these high-quality stocks for ones with qualifying Chowder numbers (37 passed), with a projected 5-year yield on cost of at least 4% (70 passed), and trading below my risk-adjusted Buy Below prices (200 passed).

Only 18 Dividend Radar passed all the screens.

Qualifying Chowder Numbers

The so-called Chowder Rule f avors dividend growth stocks likely to produce annualized total returns of at least 8%.

You implement the Chowder Rule by adding a stock's forward dividend yield and its 5-year dividend growth rate [DGR] to obtain the Chowder Number[C#].

Chowder required a margin of safety based on whether the stock is a Utility sector stock and based on the stock's yield:

1. Stocks yielding less than 3% require a C# of at least 15%.
2. Stocks yielding at least 3% require a C# of at least 12%.
3. Utility stocks yielding at least 4% require a C# of at least 8%.

Higher-yielding utility stocks get special treatment because utilities are regulated and enjoy regional competitive advantages. As a result, utilities have relatively stable yields and growth rates.

While the Chowder Rule is sensible and intuitive, it uses a trailing metric (the 5-year DGR) to predict future growth. There is no guarantee that a company will maintain the same dividend growth rate in the future.

For this reason, I use two more metrics to predict future growth, the 5-year EPS growth rate [EGR] and the 5-year revenue growth rate [RGR]. These metrics provide additional hints of future growth prospects as companies pay dividends from earnings, and earnings depend on revenue.

I define and calculate the Adjusted Chowder Number [ACN] as follows:

The ACN caps the yield side of the equation to 10% and the growth side of the equation to 30%. Moreover, it averages the minimum and median of the three growth rate metrics.

By qualifying Chowder Numbers, I mean:

Projected 5-Year Yield on Cost

The 5-year yield on cost [YOC] is an income-oriented metric indicating the projected YOC after buying and holding a stock for five years.

Assume you buy a stock today and hold it for five years. If the company continues to increase its dividend at the same DGR as over the past five years, your 5-year YOC would be the dividend you receive annually relative to today’s stock price.

To calculate the 5-year YOC is easy:

Here, ^5 means to the 5th power .

I prefer to invest in stocks with a 5-year YOC of greater than 4%.

Risk-Adjusted Buy Below Price

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

This month's valuation screen looks for stocks trading below my risk-adjusted Buy Below prices.

Ranking by Quality

As mentioned earlier, only 18 candidates passed all 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:

1. Dividend Safety Scores (from Simply Safe Dividends)
2. Credit Ratings (from S&P Capital)
3. Forward Dividend Yield

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

The 10 Dividend Growth Stocks for October

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

The six stocks I own in my DivGro portfolio are highlighted.

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

1. NextEra Energy

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.

2. Lowe's

LOW is a home improvement retailer. The company offers a complete line of maintenance, repair, remodeling, and home decorating products. 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.

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. American Electric Power

AEP is a public utility holding company that generates, transmits, and distributes 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.

5. 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.

6. Tractor Supply

Founded in 1938 and headquartered in Brentwood, Tennessee, TSCO operates rural lifestyle retail stores in the United States. The company provides equine, livestock, pet, and small animal products necessary for their health, care, growth, and containment. TSCO also provides hardware, truck, towing, tools, seasonal products, clothing, and footwear.

7. Eversource Energy

Formerly known as Northeast Utilities, ES is a utility holding company that generates, transmits, and distributes 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.

8. Evergy

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. Enterprise Products Partners

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.

10. L3Harris Technologies

LHX, an aerospace and defense technology company, provides mission-critical solutions worldwide for government and commercial customers. 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.

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:

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 30% versus SPY's 55%.

The stocks offer yields from 2.08% ( LOW ) to 7.25% ( EPD ). ES and EVRG have forward yields above 5% and are great candidates for income investors. EPD is another solid candidate if you're inclined to invest in MLPs.

TSCO (28.3%) and ( LOW ) have the highest 5-year DGRs and are excellent candidates for growth-oriented investors.

The same stocks ( TSCO , LOW ) have the highest 5-year TTRs and, along with HD , are the stocks in this month's list that have outperformed SPY over the trailing 5-year period:

As for valuations, NEE (-32%), ES (-32%), BMY (-27%), and EVRG (-27%) 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, NEE and EVRG are underweight positions. Based on how I calculate target weights , I'd need to add 150 shares of NEE and 250 shares of EVRG to turn these into full-sized positions.

As for the stocks I don't own, AEP , ES , and EPD pass my stock selection criteria for adding new positions to my DivGro portfolio:

However, I don't invest in MLPs so AEP and ES are the only candidates I'll consider adding to DivGro.

AEP looks like the better candidate based on its quality score, but ES is discounted more and offers a higher yield.

According to Portfolio Insight, AEP has a 1-year upside of 24% based on a target price of $91:

Both valuation charts indicate clearly that AEP is trading below the Undervalue Price . The top chart is based on 10-year P/E histories and earnings estimates, while the bottom chart is an implementation of Yield Channel Charts , a way to assess market valuation relative to historical yield patterns.

With a non-GAAP payout ratio of only 65% (a low value for utilities), AEP has plenty of room to continue paying and raising its dividend. According to Simply Safe Dividends, AEP's dividend is deemed Very Safe with a Dividend Safety Score of 81.

ES has a 1-year upside of 24% based on a target price of $79:

ES is trading below the Undervalue Price in both valuation charts. With its non-GAAP payout ratio of 66%, ES also has plenty of room to continue paying and raising its dividend. ES's dividend is deemed Very Safe with a Dividend Safety Score of 88.

I'll likely increase my NEE and EVRG positions before opening any new positions.

Concluding Remarks

I screened Dividend Radar stocks for high-quality stocks with superior growth and income prospects and stocks trading below my risk-adjusted Buy Below prices. Given 18 candidates that passed all the screens, I ranked them by quality score and presented the ten top-ranked stocks for your consideration.

I own six of these stocks in my DivGro portfolio. Of the four stocks I don't own, only AEP and ES look interesting to me. However, I'll probably add to my NEE and EVRG positions before opening positions in AEP or ES.

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

• For income investors: ES and EVRG (and EPD if you invest in MLPs)
• For value investors: NEE , ES , BMY , and EVRG
• For growth-oriented investors: TSCO and LOW

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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