EVRG - 10 Dividend Growth Stocks - June 2023

2023-06-23 09:15:00 ET

Summary

• This monthly series ranks a selection of dividend growth stocks in Dividend Radar and presents the ten top-ranked stocks for consideration and possible investment.
• The stocks were selected based on quality, safety, valuation, and yield/growth criteria, with a focus on high-quality, discounted stocks with safe dividends likely to deliver annualized returns of at least 8%.
• I rank stocks by sorting them in descending order by quality score and using tie-breaking metrics where necessary.

Welcome to the June 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.

I rank stocks by sorting them in descending order by quality score , breaking ties with additional metrics. My quality scoring system employs widely used quality indicators from independent sources to assess the quality of dividend growth stocks.

This month, I decided to screen for high-quality, discounted stocks with safe dividends likely to deliver annualized returns of at least 8%. Additionally, I required forward dividend yields of at least 1.75%.

To find stocks likely to deliver annualized returns of at least 8%, I use the Chowder Rule of dividend growth investment. My implementation of the Chowder Rule uses three trailing metrics to predict future growth, the 5-year dividend growth rate, the 5-year EPS growth rate , and the 5-year revenue growth rate.

Screening and Ranking

For this month's article, I used the following screens:

• Quality

  • High-quality stocks (quality scores: 21-30)
  • Dividend Quality Grades of B+ or higher
• Safety
  • Dividend Safety Scores of 61-99 ( Safe and Very Safe )
  • Dividend increase streaks of 10 or more years
• Valuation
  • Stocks price < fair value [FV] estimate
  • Forward dividend yield > 5-year average dividend yield
  • Stock price < risk-adjusted Buy Below price (see below)
• Yield and Growth
  • Forward dividend yield ? 1.75%
  • Qualifying Adjusted Chowder Number [ACN]

My risk-adjusted Buy Below prices allow premium valuations for the highest-quality stocks but require discounted valuations for lower-quality stocks:

To estimate fair value [FV], I reference fair value estimates and price targets from several sources, including Portfolio Insight, Morningstar, and Finbox. Additionally, I estimate fair value using the 5-year average dividend yield of each stock. 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.

Qualifying ACNs

The Chowder Rule finds dividend growth stocks likely to produce annualized total returns of at least 8%. It does so by adding a stock's dividend yield and 5-year dividend growth rate [DGR] to obtain the so-called Chowder Number and requiring a margin of safety depending on the stock's yield and whether it is a utility stock.

I calculate the ACN (Adjusted Chowder Number) using two additional trailing metrics, the 5-year EPS growth rate [EGR] and the 5-year revenue growth rate [RGR].

Companies pay dividends from earnings, and earnings depend on revenue, so the EGR and RGR provide additional hints about future growth prospects.

Here's the formula:

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, essentially ignoring the highest growth rate.

By qualifying ACNs, I mean:

• For DG stocks yielding less than 3%: ACN ? 15%
• For DG stocks yielding at least 3%: ACN ? 12%
• For utility stocks yielding at least 4%: ACN ? 8%

Ranking by Quality

The latest Dividend Radar (dated June 16, 2023) contains 728 stocks. Of these, 234 stocks have quality scores in the range of 21-30, 398 trade below my Buy Below price, and 205 have qualifying ACNs. When combining all of this month's screens, only 13 candidates make the cut.

I ranked the candidates by sorting their quality scores in descending order and breaking ties using the following metrics, in turn:

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

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

Top 10 Dividend Growth Stocks for June

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

Top 10 Dividend Growth Stocks for June 2023

I own the highlighted stocks in my DivGro portfolio .

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

1. Lowe's ( LOW )

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.

2. Home Depot ( HD )

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.

3. 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.

4. Pfizer ( PFE )

Headquartered in New York and founded in 1849, PFE is one of the world's largest pharmaceutical firms. The company discovers, develops, and manufactures healthcare products. PFE offers medicines and vaccines in various therapeutic areas, serving wholesalers, retailers, hospitals, clinics, government agencies, pharmacies, and individual provider offices, as well as disease control and prevention centers.

5. Tractor Supply ( TSCO )

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, and seasonal products, as well as clothing and footwear.

6. 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.

7. 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 utility segments provide electricity to customers in South Dakota, Wyoming, Colorado, and Montana; and natural gas to customers in Colorado, Nebraska, Iowa, and Kansas.

8. 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.

9. Spire ( SR )

Formerly known as The Laclede Group, Inc, SR engages in the purchase, retail distribution, and sale of natural gas to residential, commercial, industrial, and other end-users of natural gas customers in the United States. SR was founded in 1857 and is headquartered in St. Louis, Missouri.

10. Crown Castle ( CCI )

CCI owns, operates, and leases more than 40,000 cell towers and more than 75,000 route miles of fiber supporting small cells and fiber solutions across every major U.S. market. This nationwide portfolio of communications infrastructure connects cities and communities to essential data, technology, and wireless service.

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

• Buy Below : my risk-adjusted buy-below price

• –Disc +Prem : discount or premium of the recent share Price to my Buy Below price

• Price : recent share price

Commentary

CCI (5.71%), SR (4.52%), PFE (4.24%), EVRG (4.19%), and BKH (4.11) have forward yields above 4% and are strong candidates for Income Investors.

TSCO (21%), CCI (16%) , LOW (15%), HD (15%), and BMY (15%) have the highest ACNs, so these stocks have the best total return prospects and are excellent choices for Growth Investors.

CCI (-22%), PFE (-21%), and BMY (-20%) are discounted most relative to my Buy Below prices, so they are great candidates for Value Investors.

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 42% versus SPY's 60%. Perhaps this is unsurprising, as nine of the top ten stocks have a Beta below 1.

Four stocks 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 ? 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

In rank order, these stocks are BMY , TSCO , EVRG , and BKH .

I don't own TSCO and EVRG, so I'll be looking into these candidates as possible additions to my DivGro portfolio.

Concluding Remarks

In this article, I ranked Dividend Radar stocks that passed several Quality, Safety, Valuation, and Yield/Growth screens.

I own six of the ten top-ranked stocks this month and will be looking into possibly opening positions in TSCO and EVRG .

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

Thanks for reading, and take care, everybody!

For further details see: