TXN - My Top 15 High Growth Dividend Stocks For December 2023

2023-12-03 10:32:08 ET

Summary

• The SPDR S&P 500 ETF was up 9.13% in November, Vanguard's Dividend Appreciation ETF was up 7.47%, my watchlist beat both with a return of 10.24%.
• The top 15 dividend growth stocks for December offer an average dividend yield of 1.99% and appear to be about 34% undervalued based on dividend yield theory.
• Since inception, September 2020, the watchlist is rocking a cool 11.76% annualized return, beating VIG by 2.36% and SPY by 1.52%.

Quality Stocks

The SPDR S&P 500 ETF ( SPY ) rocked a cool 9.13% return in November, fully erasing the loss incurred during the prior three months. This wonderful return also sees SPY claw its way back above a 20% year-to-date return that more than offsets its loss from the prior year. Vanguard's Dividend Appreciation ETF ( VIG ) locked in a solid gain of 7.47% last month as well. My watchlist outpaced both ETF's posting a very strong double digit gain of 10.24%. This was the second best single month return for the watchlist and the third ever double digit month. Year-to-date the watchlist is up 10.39%, compared to a gain of 9.96% for VIG and a gain of 20.67% for SPY.

While SPY continues to beat my watchlist this year, since inception, the watchlist remains dominant, outperforming VIG by 2.36% and SPY by 1.52% on an annualized basis.

My goal is not to beat SPY or VIG but to generate a long-term rate of return of at least 12%. Currently the watchlist return is sitting below this target but I remain optimistic for the future.

The main focus of this watchlist is to find the best combination of quality companies trading for attractive prices. I believe this is the optimal long-term strategy to build wealth.

The top 15 dividend growth stocks for December offer an average dividend yield of 1.99%. Collectively, they have increased dividend payments at a rate of 29.78% during the last 5 years. Based on dividend yield theory, these 15 stocks are about 34% undervalued right now, and I think they are poised to offer strong long-term returns.

I would recommend two approaches to dividend investing. The first is to dollar-cost average into at least 10-20 or more quality dividend-paying stocks across multiple sectors and industries. By dollar-cost averaging, you eliminate the risk of trying to value a stock and over a long enough period, theoretically, you will buy shares at market highs, lows, and in-between resulting in an average cost basis somewhere in the middle. The second method carries a little more risk. Invest in undervalued stocks, also dollar-cost averaging into at least 10-20 unique quality companies across multiple sectors and industries. The additional risk with this approach comes from the chance that your valuation method proves to be incorrect. However, by investing in multiple unique stocks, the odds that you accurately identify at least a few undervalued stocks increases. The resulting upside from a few correct picks may more than offset the underperformance from the bad ones.

Watchlist Criteria

The criteria used to determine which stocks are included in my high-growth dividend stock watchlist remains unchanged for December 2023. It is made up of the 8 factors listed below that have historically outperformed the broad universe of dividend-paying stocks when analyzed collectively.

• Market Cap of at least $10 billion.
• Payout Ratio no greater than 70%.
• 5-year Dividend Growth rate of at least 5%.
• 5-year Revenue Growth rate of at least 2%.
• 5-year EPS Growth rate of at least 2%.
• S&P Earnings and Dividend Rating of B+ or better.
• Wide or Narrow Moat (Morningstar).
• Exemplary or Standard Management Team (Morningstar).

The rules identified 127 stocks for the month that were all ranked based on the above-mentioned metrics with the exclusion of market cap. I then computed the current valuation for each stock using dividend yield theory. All stocks were ranked for both quality and valuation and sorted by the best combination of both. Next, I computed a forecasted rate of return for the next 5-year period for each of the stocks. This return is based on forecasted earnings growth, a return to fair value, and the dividend yield.

The highest-ranked 15 stocks with a forecasted return greater than or equal to 12% were chosen for the watchlist. The long-term hypothesis for this watchlist is that it will outperform a broad quality dividend fund such as Vanguard's Dividend Appreciation ETF, VIG, and that it will generate a 12% annualized rate of total return.

Watchlist For December 2023

Above are the 15 stocks I am considering for further evaluation during the month. They are sorted in descending order by their rank and 5-year dividend growth rate.

The "O/U" column represents potential undervalue; this is a comparison of the current dividend yield to the historical dividend yield as a function of share price.

The expected return in the table above was computed using a discounted 5-year EPS forecast, a return to fair value, and the current dividend yield. There is also a margin of safety built into the forecasted return. These figures are just assumptions based on the available data and there is no guarantee these returns will be attained.

There are 4 changes to the top 15 list from the prior month. Lowe's ( LOW ), Monolithic Power Systems ( MPWR ), Skyworks Solutions ( SWKS ) and W. R. Berkley ( WRB ) have fallen further down the list, or do not meet the 12% expected rate of return threshold and were replaced by Bank of America ( BAC ), Discover Financial Services ( DFS ), EOG Resources ( EOG ) and Visa ( V ).

Past Performance

The top 15 list for November posted a gain of 10.24% and sees its long-term alpha over both benchmarks improve. The long-term annualized rate of return for the watchlist increased from 8.68% last month to 11.76%. My target rate of return is 12%, and despite the volatility in the market this year, I remain optimistic that this watchlist will climb back above this goal in the long run.

Top 5 past and present watchlist stocks in October 2023:

• Paramount Global ( PARA ) +32.08%
• Monolithic Power Systems ( MPWR ) +24.22%
• BlackRock ( BLK ) +22.69%
• Lam Research ( LRCX ) +21.71%
• Blackstone (BX) +21.68%

One of the top 15 stocks selected for the month of November was amongst the top 5 performing stocks last month, Monolithic Power Systems. In total, there have been 74 unique dividend stocks selected by this watchlist since September of 2020.

Top 5 Stocks by Total Return since joining the watchlist:

1. NVIDIA ( NVDA ) +251.90% (32 months).
2. Progressive ( PGR ) +92.78% (34 months).
3. Cintas ( CTAS ) +79.15% (34 months).
4. KLA Corporation ( KLAC ) +78.63% (31 months).
5. Automatic Data Processing ( ADP ) +76.63% (39 months).

Since not all stocks have been on the watchlist for the full 39 months of its existence, comparing a monthly average return can help normalize the results. Here are the top 5 stocks with the highest average monthly return since joining the watchlist.

1. NVIDIA ( NVDA ) +4.01% (32 months)
2. Bank of America ( BAC ) +2.34% (3 months)
3. W. R. Berkley ( WRB ) +2.08% (8 months)
4. Progressive ( PGR ) +1.95% (34 months)
5. Microchip Technology ( MCHP ) +1.91% (6 months)

Drivers Of Alpha

The watchlist outperformed VIG in November. Twelve watchlist stocks outpaced the ETF last month.

• ( MPWR ) +24.22%
• ( SCHW ) +18.38%
• ( MCHP ) +17.67%
• ( DPZ ) +15.90%
• ( SWKS ) +12.55%
• ( ZTS ) +12.53%
• ( SSNC ) +12.44%
• ( MSCI ) +10.76%
• ( SIRI ) +9.97%
• ( ROL ) +8.75%
• ( WRB ) +7.61%
• ( TXN ) +7.53%

The remaining 3 stocks underperformed VIG.

• ( TSCO ) +5.97%
• ( LOW ) +4.33%
• ( CI ) -14.98%

Total Return For All Watchlist Stocks

Here are the total returns for all past and present watchlist stocks since first appearing on the watchlist. Out of the 74 stocks that are on this list, 55 (47 last month) have positive total returns and 19 have negative total returns, the average return is 22.07% (11.60% last month). The watchlist has been around for 39 months, the average duration for all 74 stocks is 30.05 months.

Dividend Analysis for New Stocks

Below are a 7-year dividend yield theory chart, a dividend history chart, and a dividend growth table for the 4 new stocks on the watchlist this month.

First up is Bank of America

Up next is Discover Financial Services.

Up next is EOG Resources.

For further details see: