LIN - My Top 10 Dividend Growth Stocks To Invest In May 2023

2023-04-26 16:00:00 ET

Summary

• Today, I will introduce you to a list of dividend growth stocks that I consider to be particularly attractive to invest in for May 2023.
• The 10 selected picks have shown an Average Dividend Growth Rate [CAGR] of 14.91% over the last 5 years.
• In addition to that, I consider the Valuation of these picks to be attractive: on Average, they have a P/E [FWD] Ratio of 20.23.

Investment Thesis

I believe that it's essential to include dividend growth companies in any investment portfolio built with a long investment-horizon. The reason being that it allows you to significantly increase the amount of dividends you receive year after year from the companies you have invested in.

Therefore, I have selected 10 dividend growth companies for you that I currently consider to be attractive to invest in. All these picks have strong competitive advantages, are attractive in terms of growth and are currently undervalued or at least fairly valued. In addition to that, they are all financially healthy.

First, I would like to explain the selection process for my top dividend growth stocks of the month of May. Since I have already explained this selection process in a previous article , you can skip the following description written in italics, if you are already familiar with the selection process.

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 among which I will select the top dividend growth stocks of the month:

• 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 > 8%
• Moody's credit rating: at least B

I consider these metrics mentioned above important in order to help you to make well founded investment decisions and to increase the probability of making good investment decisions.

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 make the stock price decline significantly in a short period of time.

A relatively high Dividend Growth Rate of more than 5% over the past 5 years ensures to increase the probability that the company will be 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 you that you run less risk of the share price decreasing significantly in s short-period of time in case that growth expectations for the company are not met. This can contribute to help you to protect you from losing a significant amount of money in a short period of time.

An EBIT Margin or Net Income Margin of more than 5% and a Return of Equity of more than 8% help to filter out companies that are profitable.

A credit rating of Moody's of at least B serves as an additional indicator of the financial strength of the companies.

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 against the competition in the long term. Companies without strong competitive advantages have a higher probability to go bankrupt one day, 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 of the companies, 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 select only companies that currently have an attractive Valuation, helping 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 a fourth and last step of the selection process, I have established the following rules for my top picks of the months selection: in order to help you to diversify your investment portfolio, a maximum of 2 companies should be from the same industry. In addition to that, there should be at least one pick that is from a company that is based outside of the United States, serving as an additional geographical diversification.

New Companies when compared to the list of the previous month

• American Express (NYSE: AXP )
• Itaú Unibanco Holding S.A. (NYSE: ITUB )
• Nike (NYSE: NKE )
• Linde (NYSE: LIN )
• The Travelers Companies (NYSE: TRV )

My Top 10 Dividend Growth Companies to invest for May 2023

Below you can find the 10 dividend growth companies that I have selected. I consider each of them to be particularly attractive to invest in at this moment in time:

• American Express
• Apple (NASDAQ: AAPL )
• Itaú Unibanco Holding S.A.
• JPMorgan (NYSE: JPM )
• Mastercard (NYSE: MA )
• Microsoft (NASDAQ: MSFT )
• Nike
• Linde
• The Charles Schwab Corporation (NYSE: SCHW )
• The Travelers Companies

Overview of the selected Dividend Growth Stocks to invest in May 2023

Source: Seeking Alpha

American Express

American Express was founded in 1850 and is based in New York. The company has 77,300 employees and a current market capitalization of $121.49B. American Express pays its shareholders a Dividend Yield [FWD] of 1.47%. What makes the company so attractive for dividend growth investors is its low Payout Ratio of only 22.71% in combination with its relatively high Dividend Growth Rate [CAGR] of 9.53% over the past 5 years.

The company's current P/E [FWD] Ratio stands at 14.78, which means that it lies 20.26% below its Average P/E [FWD] Ratio from over the past 5 years (which is 18.54). This metric indicates that American Express is undervalued at this moment in time, which is also confirmed when we look at the company's Price / Sales [FWD] Ratio: its current Price / Sales [FWD] Ratio is at 2.00, lying 16.89% below its Average over the past 5 years (2.41).

Below you can find a graphic showing the projection of the company's Yield on Cost when assuming an Average Dividend Growth Rate of 8% over the next 30 years (I have made a conservative projection, since its Dividend Growth Rate 10Y [CAGR] is 10.44%).

When assuming this Dividend Growth Rate of 8% and that you would buy the stock at its current price of $163.78, you could expect a Yield on Cost of 3.16% in 2033, 6.83% in 2043 and 14.75% in 2053. The graphic confirms my thesis that the company is an excellent pick for dividend growth investors that invest with a long time-horizon.

Apple

Apple continues to be part of my list of attractive dividend growth stocks to invest in for May 2023.

Apple is the largest individual position of my own personal investment portfolio and I don't have any plans to change this in the near future.

The company's low Payout Ratio of just 15.45% is a strong indicator that investors can still expect further dividend enhancements in the years to come.

The company has shown a Dividend Growth Rate [CAGR] of 12.48% over the past 10 years, which reinforces my theory that Apple should be part of this list of dividend growth stocks to invest in for May 2023.

Apple's current P/E [FWD] Ratio of 27.89 is only slightly above both the Sector Median (24.64) and its Average P/E [FWD] Ratio from over the past 5 years (23.59). Therefore, I continue to believe that the company is currently fairly valued.

Itaú Unibanco

Itaú Unibanco was founded in 1924 and is based in Sao Paulo, Brazil. The company has 100,600 employees and currently a Market Capitalization of $45.68B. It is the largest bank in Brazil in terms of Revenue.

I consider Itaú Unibanco's current Valuation to be attractive: its P/E [FWD] Ratio stands at 7.20, which is not only 18.23% below the Sector Median of 8.81, but also 33.40% below its Average over the past 5 years (10.81).

The bank has shown a Dividend Growth Rate 5Y [CAGR] of 30.04%, which strengthens my belief that the company is an excellent fit for dividend growth investors.

The Seeking Alpha Factor Grades once again confirm that Itaú Unibanco should be an excellent fit for your investment portfolio: the bank is rated with an A+ in terms of Profitability and with an A for Growth. For Momentum and Revisions, the company receives a B rating and for Valuation, a B-.

JPMorgan

JPMorgan has a long history dating back to its foundation in 1799. Today, the company has 296,877 employees, and it operates through the following segments :

• Consumer & Community Banking
• Corporate & Investment Bank
• Commercial Banking
• Asset & Wealth Management

Investing in the bank at its current stock price of $140.54 pays you a Dividend Yield [FWD] of 2.84%. The bank's Dividend Growth Rate [CAGR] over the past 10 years stands at 16.09%, which is clearly above the Sector Median of 8.34%. This serves as a strong indicator that JPMorgan is an excellent pick for those investors seeking dividend growth.

Moreover, it can be highlighted that the bank is currently undervalued: the reason for this is that its P/E [FWD] Ratio of 9.92 is 19.69% below its Average from over the past 5 years.

Linde

Linde is an internationally operating oil and gas company that was founded in 1879. The company has 65,010 employees and is based in Woking, United Kingdom. It currently has a Market Capitalization of $180.13B.

At the company's current stock price of $366.21, Linde pays its shareholders a Dividend Yield [FWD] of 1.39%. The company has a Payout Ratio of only 38.08% and has shown a Dividend Growth Rate [CAGR] of 8.46% over the past 5 years. All these metrics indicate that Linde is an excellent choice for those investors seeking dividend growth.

I consider the company to be currently fairly valued, since its P/E [FWD] Ratio of 31.68 stands 6.18% below its Average over the past 5 years (33.77).

The Seeking Alpha Dividend Grades confirm Linde to be a great fit for dividend income and dividend growth investors: the company receives an A+ in terms of Dividend Safety and Dividend Consistency and an A rating for Dividend Growth.

Mastercard

There are a lot of different reasons that justify having Mastercard in my list of top dividend growth companies to invest in for May 2023.

One being the company's strong Profitability, which is not only underlined by its high EBIT Margin [TTM] of 56.77% (which is 156.21% above the Sector Median) and its high Levered FCF Margin [TTM] of 47.84% (160.90% above the Sector Median), but also by its high Return on Equity of 145.92%.

Moreover, Mastercard's growth prospects are excellent: the company's strength in terms of Growth is confirmed when taking a look at its Average Revenue Growth Rate [FWD] of 13.49% over the past 5 years and its Average EBIT Growth Rate [FWD] of 15.45% over the same time period.

Below you can find Mastercard's Compound Annual Growth Rates [TTM], which further confirm the company's strength when it comes to Growth.

Microsoft

Microsoft's history goes back to 1975. Today, the company has 221,000 employees and operates through the following segments :

• Productivity and Business Processes
• Intelligent Cloud
• and More Personal Computing.

Adding Microsoft to your investment portfolio can not only help you to increase its Average Dividend Growth Rate, but also to increase portfolio diversification.

Given Microsoft's broad product portfolio, I believe that the company is well ahead of competitors such as Alphabet (NASDAQ: GOOG ) (NASDAQ: GOOGL ) or Meta (NASDAQ: META ) when it comes to Diversification.

The company has a Dividend Growth Rate [CAGR] of 11.70%, which is 24.52% above the Sector Median as well as an attractive Free Cash Flow Per Share Growth Rate [FWD] of 10.06%. These metrics serve to increase my confidence that Microsoft is a perfect fit for dividend growth investors and that it should be part of this list of dividend growth companies to invest in for May 2023.

Moreover, I believe that the company is fairly valued: its P/E [FWD] Ratio is 30.95. This means that it lies just 3.09% above its Average P/E [FWD] Ratio over the past 5 years.

According to the Seeking Alpha Dividend Grades, Microsoft is rated with an A+ for both Dividend Safety and Dividend Growth. Below you can find an overview of the company's Dividend Safety Grades.

Nike

Even though Nike's Valuation is not particularly attractive at this moment in time, it still deserves to be part of this list of high dividend growth stocks to invest in for the month of May. The reason for this is not only the company's strong competitive advantages (such as its strong brand image and endorsement contracts with the world's top sports athletes and teams) and its economic moat over its competitors, but also its excellent characteristics as a dividend growth company.

Nike's Dividend Growth Rate 10Y [CAGR] stands at 14.35%, which is 27.95% above the Sector Median.

When having a look at the company's P/E [FWD] Ratio, we can further see that it is fairly valued: its current P/E [FWD] Ratio of 38.44 only stands 4.91% above its Average over the past 5 years.

Nike's excellent position within its industry is underlined when observing its EBIT Margin [TTM] of 12.17%, which lies 56.58% above the Sector Median (7.77%) and significantly above the one of competitors such as adidas ( OTCQX:ADDDF ) (EBIT Margin [TTM] of 3.25) and Under Armour (NYSE: UA ) (NYSE: UAA ) (-2.30%).

Below you can find some Profitability metrics that compare Nike withs its competitors adidas and Under Armour and which, once again, underline Nike's strong competitive position.

The Charles Schwab Corporation

I continue to consider Charles Schwab's Valuation to be attractive, a fact that has contributed significantly to the company being part of this list of dividend growth stocks to invest in for May 2023.

The company's P/E [FWD] Ratio currently stands at 18.01, which is 12.40% below its Average over the past 5 years. Charles Schwab's Price / Sales [FWD] Ratio of 5.00 is also clearly below its Average Price / Sales [FWD] Ratio from over the past 5 years (6.35).

In addition to that, it can be highlighted that the company's current Dividend Yield [TTM] of 1.65% is 32.97% above its Average Dividend Yield [TTM] over the past 5 years, which serves as an additional indicator that Charles Schwab is undervalued at this moment of writing.

The Seeking Alpha Growth Grades, which you can find below, further confirm that the company is on track in terms of Growth, a factor that has also contributed enormously to it being part of this list.

The Travelers Companies

The Travelers Companies provides its clients with commercial and personal property , as well as casualty insurance products and services. The company was founded in 1855 and is based in New York.

The company pays a Dividend Yield [FWD] of 2.23% and has a Payout Ratio of only 30.29%, which is a clear indicator that there is plenty of room for dividend enhancements in the future.

In addition to that, the company's Dividend Growth Rate 10Y [CAGR] is 7.29%, which shows further evidence that Travelers Companies is an excellent fit for dividend growth investors.

The company's current P/E [FWD] Ratio is at 12.45, being 4.34% below its Average over the past 5 years (13.01), demonstrating that it's undervalued at this moment in time.

In addition to the above, it can be highlighted that Travelers Companies has an attractive Rating as according to the Seeking Alpha Quant Ranking: the company is ranked 5th out of 46 within the Property and Casualty Insurance Industry and 93rd out of 708 within the Financials Sector.

Conclusion

This list of dividend growth companies should help you to select attractive companies in order to increase the Average Dividend Growth Rate of your investment portfolio.

The selected picks have shown an Average Dividend Growth Rate of 14.91% over the past 5 years. Due to the fact that they have shown significant dividend growth in the past, in combination with the companies' strong competitive advantages and their strong financials, I believe that these picks will continue showing significant dividend growth.

Investing over the long term in dividend growth companies with healthy financials and strong competitive advantages, not only helps you to raise the Average Dividend Growth Rate of your portfolio, but also to increase the dividend income you receive the moment you retire.

It takes time to see the results when investing in dividend growth companies, but it's worth it because when selecting the appropriate dividend growth companies, the probability of making successful long-term investment decisions is high: selecting the right dividend growth companies can help you to invest successfully over the long term instead of losing money while speculating over the short term.

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? What are currently your favorite dividend growth stocks to buy?

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