ADP - 10 Dividend Growth Stocks For September 2023

2023-09-26 09:00:00 ET

Summary

• In this monthly series, I rank a selection of dividend growth stocks in Dividend Radar and present the ten top-ranked stocks for consideration.
• To rank stocks, I do a quality assessment and sort stocks by quality scores, breaking ties with additional metrics.
• This month, I'm presenting stocks with A+ Dividend Quality Grades and strictly increasing dividends, earnings, and revenue over the past decade.

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. Dividend Radar is a weekly automatically generated spreadsheet of dividend growth [DG] stocks with dividend increase streaks of five or more years.

To look for interesting candidates, I apply different screens every month to highlight different aspects of dividend growth investing. For example, this month, I'm focusing on stocks with A+ Dividend Quality Grades and strictly increasing dividends, earnings, and revenue over the past decade.

I do a quality assessment of stocks and assign a quality score to each Dividend Radar stock. To rank stocks, I sort them in descending order by quality score and use tie-breaking metrics when necessary.

Screening and Ranking

The latest Dividend Radar (dated September 22, 2023) contains 722 stocks. Of these, 103 have A+ Dividend Quality Grades and only 13 pass the very stringent screens of "strictly increasing dividends, earnings, and revenue over the past decade".

Dividend Quality Grade

In January 2023, I added a sixth quality indicator to my quality scoring system , Portfolio Insight's Dividend Quality Grade , which differentiates between companies likely to increase their dividend during the next 12 months and companies at risk of freezing or cutting their dividends. Grades range from A+ to F, with F indicating companies at significant risk of cutting their dividends. In backtesting the system, it accurately predicted a failure to continue dividend increases in more than 98% of cases.

The Dividend Quality Grade is automatically determined from broker-grade data. The system analyzes 20 different metrics over a 10-year timeframe and determines a quality range for each metric using data from DG stocks with dividend increase streaks of at least ten years. The analysis is done per GICS sector, so each stock receives a score per metric based on where it falls in the corresponding quality range.

Individual metric scores are combined into component scores as follows:

• EPS Performance & Outlook
• Dividend Performance and Outlook
• Revenue Performance & Outlook
• Financial Performance
• Profitability Performance

The component scores are rolled into an overall score per ticker, then ranked based on where they fall by percentile. The rankings determine a stock's Dividend Quality Grade from A+ to F.

For this month's article, I screened for stocks with an A+ Dividend Quality Grade .

Strictly Increasing Dividend, Earnings, and Revenue

When considering candidates for my portfolio, I like to review their dividend, earnings, and revenue histories. I prefer to invest in candidates with increasing dividends, earnings, and revenue over the past decade.

To sustainably pay and increase dividends year after year, a company must increase its earnings and revenue at growth rates that equal or exceed the dividend growth rate. Expanding the payout ratio can accommodate higher dividend growth rates for several years, but not sustainably so in the long run.

" Strictly Increasing " is a very stringent screen! Few companies have managed to grow their dividends, earnings, and revenue every year for the past ten years. This is a remarkable accomplishment, especially since that period includes the COVID-19 Recession .

For this month's article, I visually inspected the relevant Portfolio Insight charts, noting DG stocks with strictly increasing Dividends, Non-GAAP EPS (or AFFO/Share, where appropriate), and Revenues.

Ranking Candidates

To rank candidates, I sort them in descending order by quality scores and use the following tie-breaking metrics when appropriate:

1. Simply Safe Dividends Dividend Safety Scores
2. S&P Global Credit Ratings
3. Forward Dividend Yield

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

Top 10 Dividend Growth Stocks for September

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

I own the five highlighted stocks in my DivGro portfolio . The following company descriptions are my summary of company descriptions sourced from Finviz and Yahoo! Finance.

1. Costco Wholesale ( COST )

Founded in 1976 and based in Issaquah, Washington, COST operates more than 850 membership warehouses and e-commerce websites in the United States and internationally. The company offers branded and private-label products in a range of merchandise categories. COST also operates gas stations, pharmacies, and food courts and engages in the travel business.

2. Automatic Data Processing ( ADP )

ADP provides cloud-based human capital management solutions worldwide. The company's Employer Services segment offers strategic, cloud-based platforms and human resources ((HR)) outsourcing solutions. Its PEO Services segment provides HR outsourcing solutions to small and mid-sized businesses through a co-employment model. ADP was founded in 1949 and is headquartered in Roseland, New Jersey.

3. Accenture plc ( ACN )

ACN provides management and technology consulting services to clients in various industries and geographic regions, including North America, Europe, and various growth markets. ACN collaborates with Amazon Web Services to develop cross-industry solutions. The company was founded in 1951 and is based in Dublin, Ireland.

4. UnitedHealth ( UNH )

UNH is a health care and well-being company operating through two distinct businesses. UnitedHealthcare provides health care benefits globally, serving individuals and employers, and Medicare and Medicaid beneficiaries. Optum's health services businesses serve the global health care marketplace by using market-leading information, analytics, and technology. UNH was incorporated in 1977 and is based in Minnetonka, Minnesota.

5. Brown & Brown ( BRO )

BRO markets and sells a range of insurance and reinsurance products and services, as well as risk management, third-party administration, managed health care, and Medicare set-aside services and programs. Customers include businesses, public entities, individuals, trade, and professional associations. BRO was founded in 1939 and is headquartered in Daytona Beach, Florida.

6. Cintas ( CTAS )

Headquartered in Cincinnati, Ohio, CTAS provides corporate identity uniforms and related business services in the United States, Canada, and Latin America. The company offers its products and services through a distribution network and local delivery routes, or through local representatives, to small service and manufacturing companies, as well as major corporations. CTAS was founded in 1968.

7. Cencora ( COR )

Founded in 1947 and headquartered in Conshohocken, PA, COR is a leading global pharmaceutical solutions organization focused on improving the lives of people and animals worldwide. The company partners with pharmaceutical innovators across the value chain to facilitate and optimize market access to therapies. Previously known as AmerisourceBergen, COR changed its name to Cencora in 2023.

8. 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.

9. Rollins ( ROL )

ROL provides pest and wildlife control services to residential and commercial customers in the United States and internationally. The company's pest control services include protection against termite damage, rodents, insects, and wildlife. It serves clients directly and through franchisee operations. ROL was founded in 1948 and is headquartered in Atlanta, Georgia.

10. Broadridge Financial Solutions ( BR )

BR provides investor communications and technology-driven solutions to banks, broker-dealers, mutual funds, and corporate issuers in the United States and internationally. The company operates through two segments: Investor Communication Solutions, and Global Technology and Operations. BR was founded in 1962 and is headquartered in Lake Success, 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:

Here are the Sector and Super Sector designations of each candidate:

I use a survey approach to estimate fair value [FV], collecting fair value estimates and price targets from several online sources such as Portfolio Insight, Morningstar, and Finbox. 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:

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 outperformed the S&P 500 (as represented by the SPDR S&P 500 Trust ETF (SPY)) over the last five years, returning 98% versus SPY's 48%.

According to Finbox.com, six of the stocks have fair value upsides, with COST , CTAS , ROL , and BR being the exceptions.

TSCO (28.3%) and CTAS (23.2%) have the highest 5-year dividend growth rates and are strong candidates for growth-oriented investors.

ADP (2.01%) is the only candidate with a forward yield above 2.0%, though TSCO (1.99%) is close.

TSCO (25.4%), CTAS (23.2%), and BRO (20.9%) have the highest 5-year TTRs.

All but one stock ( BR ) outperformed SPY over the 5-year time frame:

As for valuations, TSCO (-21%) and ROL (-14%) are discounted most relative to my Buy Below prices, making them strong candidates for value investors.

Only one stock ( TSCO ) passes all five of my stock selection criteria for adding new positions to my DivGro portfolio:

1. Stock Quality : Quality scores ? 21 ( Exceptional , Excellent , or Fine ratings.
2. Stock Valuation : Price ? Buy Below price (trades below my risk-adjusted Buy Below price.
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

TSCO is a Dividend Contender with a dividend increase streak of 14 consecutive years. The stock yields 1.99% at $206.65 and has a spectacular 5-year DGR of 28.3%.

Over the past ten years, TSCO has outperformed the SPY by a margin of 1.26 to 1, returning 260% versus SPY's 206%:

With earnings and free cash flow payout ratios of 39% and 65%, respectively, TSCO has plenty of room to continue paying and raising its dividend.

Below is Portfolio Insight's snapshot analysis of TSCO, showing the strictly increasing non-GAAP EPS, Revenue, and Dividend charts over the past ten years as well as TSCO's A+ Dividend Quality Grade :

Based on this analysis, I decided to add TSCO to my DivGro portfolio. On Monday, 25 September, I bought 75 shares at $206.08 per share. Since TSCO's annual payout is $4.12 per share, this purchase will add $309 to DivGro's projected annual dividend income (PADI).

Concluding Remarks

In this article, I ranked 13 Dividend Radar stocks with A+ Dividend Quality Grades and strictly increasing dividends, earnings, and revenues over the past ten years.

Based on this analysis, I added TSCO to my DivGro portfolio, so I now own six of the stocks in this month's top ten.

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

• For growth-oriented investors: TSCO and CTAS
• For value investors: TSCO and ROL
• For income investors: ADP and TSCO

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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