META - My Top 10 Dividend Growth Stocks For March 2023

2023-03-23 14:00:00 ET

Summary

• In today’s article, I will present 10 dividend growth companies that I currently consider to be particularly attractive.
• The 10 selected picks have shown an Average Dividend Growth Rate of 12.92% over the past 5 years.
• At the same time, they have a low Payout Ratio, are highly profitable and are also attractive in terms of Valuation, making them my top picks for this month.

Investment Thesis

When investing with a long-term investment horizon, I consider dividend growth companies to be particularly attractive for investors. This is because they help you to significantly raise your additional income in the form of dividends year over year.

In order to help you facilitate the selection process of dividend growth companies, I have selected my top 10 dividend growth stocks of this month that I currently consider to be particularly attractive for investors.

First of all, I would like to explain my selection process, which can be divided into four parts:

First step of the Selection Process: Analysis of the Financial Ratios

In a first step, companies must meet the following requirements to be part of a pre-selection, which I will then select the top dividend growth stocks of the month from:

• Market Capitalization > $15B
• Payout Ratio < 60%
• Average Dividend Growth Rate over the past 5 Years > 5%
• Dividend Yield [FWD] > 0%
• P/E [FWD] Ratio < 50
• EBIT Margin [TTM] > 5% or Net Income Margin [TTM] > 5%
• Return on Equity > 5%
• Moody’s credit rating: at least B

I consider the metrics mentioned above to be important in order to help you make well founded investment decisions and to therefore increase the probability of getting good results.

A relatively low Payout Ratio ensures that the company still has sufficient room for future dividend enhancements. This is particularly important for dividend growth investors that aim to invest with a long investment horizon. At the same time, a relatively low Payout Ratio contributes to the fact that the probability of a future dividend cut is lower. A dividend cut could lead to the stock price declining significantly in a short period of time.

A relatively high Dividend Growth Rate of more than 5% over the past 5 years increases the probability of the company being able to raise its Dividend to a significant amount in the following years.

A P/E [FWD] Ratio of less than 50 contributes to the fact that the growth expectations that are priced into the stock price of the company you aim to invest in are not extraordinarily high. This helps as you run less risk of the share price decreasing significantly in a short period of time if the growth expectations for the company are not met.

An EBIT Margin or Net Income Margin of more than 5% and a Return on Equity of more than 5% help to filter out companies that are profitable.

A credit rating from Moody’s of at least B serves as an additional indicator of the financial strength of a company.

Second step of the selection process: Analysis of the Competitive Advantages

In a second step, the companies’ competitive advantages (for example: brand image, innovation, technology, economies of scale, etc.) are analyzed in order to make an even narrower selection. I consider it to be particularly important for companies to have strong competitive advantages in order to stand out against the competition in the long term. Companies without strong competitive advantages have a higher probability of going bankrupt one day, thus representing a strong risk for investors to lose their invested money.

Third step of the selection process: The Valuation of the companies

In the third step of the selection process, I will dive deeper into the Valuation of the companies.

In order to conduct the Valuation process, I use different methods and criteria, for example, the companies’ current Valuation as according to my DCF Model, the expected compound annual rate of return as according to my DCF Model and/or a deeper analysis of the companies’ P/E [FWD] Ratio. These metrics should serve as an additional filter to only select companies that currently have an attractive Valuation, which helps you to identify companies that are at least fairly valued.

The Fourth and final step of the selection process: Diversification over Industries and Countries

In the fourth and final step of the selection process, I have established the following rules for choosing my top picks: in order to help you diversify your investment portfolio, a maximum of two companies should be from the same industry. In addition to that, there should be one pick that is from a company that is based outside of the United States, serving as an additional geographical diversification.

My Top 10 Dividend Growth Stocks to invest in March 2023

In the following, you can find the 10 dividend growth companies that I have selected for this month and that I consider to be particularly attractive at this moment in time:

• Apple (NASDAQ: AAPL )
• Bank of America (NYSE: BAC )
• BlackRock (NYSE: BLK )
• Caterpillar (NYSE: CAT )
• JPMorgan (NYSE: JPM )
• Merck & Co. (NYSE: MRK )
• Microsoft (NASDAQ: MSFT )
• Tencent ( OTCPK:TCEHY )
• UPS (NYSE: UPS )
• Visa (NYSE: V )

Below you can find an overview of the 10 selected companies.

The Average Dividend Growth Rate of the 10 selected picks over the past 5 years is 12.92%, indicating that they are an appealing choice for dividend growth investors. The Average Net Income Margin of 27.67% and the Average Return on Equity of 42.85% serve as evidence that the selected companies are strong in terms of Profitability.

The companies’ P/E [FWD] Ratio is 18.59 on Average, which is an indicator that they are relatively attractive in terms of Valuation.

Source: Seeking Alpha

Apple

There are many reasons for Apple being part of this list of dividend growth stocks to invest in for March 2023: even though the world’s leading company in terms of market capitalization ($2.49T) and brand value ($947B) is no longer as cheap as it has been in the past, it is still an excellent pick for investors seeking dividend growth.

I consider Apple to be an excellent choice for investors due to its strong competitive advantages, which are underlined by the company’s high EBITDA Margin [TTM] of 32.33%: its EBITDA Margin [TTM] is 227.71% higher than the Sector Median (9.87%).

In the past 12-month period, Apple has shown a Total Return of -3.11%, which is superior to the Total Return of the S&P 500 within the same time period (-8.73%). This is a clear expression of Apple's crisis resistance and strengthens my belief that the company could be able to continue outperforming the index in the years ahead.

In a previous analysis on Apple, you can see that my DCF Model currently indicates a compound annual rate of return of approximately 9%, thus underlying my buy rating for the company.

Bank of America

Different factors have contributed to Bank of America being part of this selection of dividend growth stocks to invest in during March 2023.

Bank of America has a Net Income Margin of 29.97%, which stands 11.62% above the Sector Median, indicating that the bank is an excellent choice when it comes to Profitability.

Moreover, I consider the bank to be particularly attractive when it comes to Valuation, since its current P/E [FWD] Ratio of 8.04 lies 33.86% below its Average of the past 5 years (12.16). The company’s current Valuation is 6.65% below the Sector Median of 8.62.

In my opinion, however, Bank of America should be rated with a premium when compared to its peer group, due to its enormous Profitability, its strong competitive advantages and its high Brand Value.

The bank’s Dividend Growth Rate of 14.87% over the past 5 years bolsters my opinion to rate it as a buy and make it part of this list of dividend growth stocks to invest in for March 2023.

BlackRock

BlackRock was founded in 1988 and currently has a Market Capitalization of $99.48B.

BlackRock’s Net Income Margin of 28.97% is above the Sector Median of 26.69%, showing that the company is an excellent pick in terms of Profitability. The same is further evidenced by its Aa3 credit rating from Moody’s.

Moreover, BlackRock pays its shareholders a Dividend Yield [FWD] of 3.11%. The company has shown a Dividend Growth Rate of 13.60% over the past 5 years, which serves as evidence that the company is a great choice for those investors seeking dividend growth.

BlackRock is also attractive in terms of Valuation: its P/E [FWD] Ratio of 18.43 is slightly below its Average over the past 5 years (19.16), demonstrating that the company is currently at least fairly valued. This once again strengthens my belief to make BlackRock part of this list of dividend growth stocks to buy in March 2023.

Caterpillar

Caterpillar manufactures construction and mining equipment. The company was founded in 1925 and it has just been named among Barron’s 100 most sustainable U.S. companies.

The company’s current Market Capitalization is $116.14B and it has an attractive Valuation: its P/E [FWD] Ratio of 14.40 lies 20.95% below the Sector Median (18.22). Moreover, its current P/E [FWD] Ratio stands 20.12% below its Average from over the past 5 years (18.03), serving as an additional indicator that the company is undervalued at its current price levels.

The combination of an attractive Dividend Yield [FWD] of 2.18%, a low Payout Ratio of 33.96% and an Average Dividend Growth Rate of 8.66% make Caterpillar a great pick for investors looking for dividend growth. All of this contributes to the company being part of this selection of dividend growth stocks.

The Seeking Alpha Dividend Grades further underline that Caterpillar is currently an appealing pick: the company is rated with an A+ in terms of Dividend Consistency and with an A- for Dividend Growth. For Dividend Safety, it is rated with a B+ and for Dividend Yield it gets a B.

JPMorgan

JPMorgan is among the safest and most diversified banks in the world and its strong competitive advantages in combination with its high Profitability and attractive Valuation make it part of my top dividend growth companies to invest in for March 2023.

With a P/E [FWD] Ratio of 9.83, I consider JPMorgan to be undervalued. Its P/E [FWD] Ratio stands 20.71% below its Average P/E [FWD] Ratio over the past 5 years and its Price / Book [FWD] Ratio of 1.31 lies 14.54% below its Average from the last 5 years.

The bank’s Dividend Growth Rate [CAGR] over the past 10 years of 16.09% indicates that it's a great pick for dividend growth investors and additionally shows that the company is on track in terms of Growth.

JPMorgan’s Dividend Growth Rate of 13.54% over the past 5 years lies above the one of competitors from the Diversified Banks Industry: Wells Fargo (NYSE: WFC ), for example, has a negative Dividend Growth Rate over the past 5 years (-5.80%) and Citigroup’s (NYSE: C ) is 12.74%.

In a previous analysis on the U.S. Banks Industry, I showed that JPMorgan is currently my top pick among U.S. banks.

Merck & Co

Merck & Co is a worldwide operating health care company and at this moment has a market capitalization of $268.71B.

It currently pays shareholders a Dividend Yield [FWD] of 2.76%. At the same time, the company has been able to raise its Dividend by 9.41% on Average over the last 5 years, which underlines my investment thesis that it’s a great pick both for dividend income and dividend growth investors.

The company’s EBITDA Margin [TTM] of 41.08% is significantly over the Sector Median of 3.39%, serving as a strong indicator of the competitive advantages it has over its competitors.

The company’s current P/E [FWD] Ratio of 16.82, which lies 36.24% below the Sector Median, contributes to making the company part of this selection of dividend growth stocks to invest in during March 2023.

Merck & Co’s current Valuation is below that of competitors such as Johnson & Johnson (NYSE: JNJ ) (P/E [FWD] Ratio of 17.59) or Novartis (NYSE: NVS ) (17.90).

Microsoft

Microsoft is part of this selection of my top 10 dividend growth stocks to invest in for March 2023, since it fulfills a large variety of requirements. The company has shown a Dividend Growth Rate of 9.92% over the past 5 years, serving as a strong indicator that it should be able to show further growth in the years ahead.

The company’s Return on Equity of 39.91% and its Aaa credit rating by Moody’s are evidence of its enormous financial strength.

Microsoft’s current P/E [FWD] Ratio of 29.46 is in line with its Average over the past 5 years, which demonstrates that the company is at least fairly valued at this moment in time.

With an EBITDA Margin of 47.99%, Microsoft is ahead of competitors such as Alphabet (NASDAQ: GOOG , NASDAQ: GOOGL ) (EBITDA Margin of 32.09%), Meta (NASDAQ: META ) (36.22%) or Oracle (NYSE: ORCL ) (38.79%) when it comes to Profitability.

Tencent

Tencent is an investment holding company that was founded in 1998 and currently has a Market Capitalization of $411.85B.

Tencent’s EBIT Margin [TTM] of 18.26%, which stands 116.52% above the Sector Median of 8.43%, demonstrates the company’s strong competitive position compared to its peer group.

Tencent has shown a Dividend Growth Rate [CAGR] of 21.10% over the past 5 years, which strengthens my belief that it should be able to raise its dividend to a significant amount in the following years.

With a P/E Non-GAAP [FWD] Ratio of 23.85, I believe that the company is currently undervalued. Its P/E Non-GAAP [FWD] Ratio of 23.85 is 26.12% below its Average from the past 5 years.

United Parcel Service

United Parcel Service is a company from the Air Freight and Logistics Industry and currently has a Market Capitalization of $160.02B.

Its EBIT Margin [TTM] of 13.74% lies 40.54% over the Sector Median of 9.78%, indicating that the company has a strong competitive position. Due to the fact that its EBIT Margin [TTM] stands 50% over its Average EBIT Margin [TTM] from the past 5 years (9.16%), we can see that the company has been able to raise its profits to a significant amount in recent years.

In addition to that, I consider UPS to be at least fairly valued at its current price levels: the company has a P/E [FWD] Ratio of 15.98, which stands 12.27% below the Sector Median, underlying my thesis to rate the company as a buy.

Furthermore, UPS’s Dividend Yield [TTM] of 3.37% lies 104.95% above the Sector Median (which is 1.64%), further indicating that the company is at least fairly valued. In addition to that, its Dividend Yield [FWD] of 3.53% lies significantly above the one of FedEx (NYSE: FDX ) (Dividend Yield [FWD] of 2.13%).

The Seeking Alpha Dividend Grades further underline my investment thesis. UPS is rated with an A+ for Dividend Growth, an A for Dividend Consistency and an A- for Dividend Yield. For Dividend Safety, it gets a B+.

Visa

Visa is among my favorite dividend growth companies due to its strong competitive advantages (including: its strong brand image, its high number of debit and credit cards, its distribution network, etc.), its enormous Profitability and the company’s wide economic moat, as well as its current Valuation. My opinion is reflected in my personal investment portfolio: Visa is one of my largest positions.

Besides its currently attractive Valuation (the company’s P/E [FWD] Ratio of 26.65 is 17.67% below its Average P/E [FWD] Ratio over the past 5 years), different metrics indicate that Visa is on track in terms of Growth: the company has shown a Revenue Growth Rate [FWD] of 14.22%, which lies 104.69% above the Sector Median (6.95%).

With an EBITDA Margin [TTM] of 70.09%, Visa is ahead of its competitors: Mastercard (NYSE: MA ), for example, has an EBITDA Margin [TTM] of 60.14% and PayPal’s (NASDAQ: PYPL ) is 17.92%.

Conclusion

The objective of this article was to present my top 10 dividend growth stocks to invest in for March 2023. I have used a selection process which consists of four steps in order to pick the companies for you.

I consider the selected picks to be particularly attractive, since they fulfill different requirements in the form of financial ratios. Furthermore, they all have strong competitive advantages over their competitors. In addition to that, the companies are currently attractive in terms of Valuation. This helps you as it means the price that you pay for the companies is at least fair. In a final step, I have chosen the companies in such a way that no more than 20% come from the same Industry and one is from a country outside of the United States. This is in order to achieve a diversification over industries and countries.

This series of dividend growth picks should help you to identify companies that can provide you with strong dividend growth in order to significantly raise your additional income in the form of dividends year over year.

Author’s note: I would love to hear your opinion on this selection of dividend growth stocks. Do you own any of these picks or plan to acquire them? Which stocks are currently your favorite dividend growth stocks to buy?

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