SWKS - My Top 15 High-Growth Dividend Stocks For February 2023

Summary

• I present my top 15 high-growth dividend stocks to consider during the month of February.
• The watchlist posted a gain of 9.44% in January and starts the new year on a positive note.
• Since inception, September 2020, the watchlist is outperforming VIG by 5.82% and SPY by 7.44% on an annualized basis.

Quality Stocks

The sour returns from 2022 are behind us and 2023 kicks off on a brighter note. The SPDR S&P 500 Trust ETF ( SPY ) returned 6.29% in January, Vanguard's Dividend Appreciation ETF ( VIG ) posted a gain of 2.90% and my watchlist rocked both benchmarks with a gain of 9.44%.

After January annualized alpha over VIG increases from 2.99% to 5.82%, and annualized alpha over SPY increases from 6.13% to 7.44%. Following the solid gain in January the watchlist once again sees its long-term annualized return climb above 12% (15.61%).

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 building wealth.

The top 15 dividend growth stocks for February offer an average dividend yield of 1.33%. Collectively, they have increased dividend payments at a rate of 28.64% during the last 5 years. Based on dividend yield theory, these 15 stocks are about 30% 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 February 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 124 stocks for the month of February 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.

Watchlist For February 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.

The large potential under-valuations for Cigna ( CI ) are overstated due to very fast recent dividend growth by the company. Dividend yield theory works best for companies with stable and consistent dividend growth.

There are 5 changes to the top 15 list from the prior month. Ball Corporation ( BALL ), Best Buy ( BBY ), Monolithic Power Systems ( MPWR ), MSCI ( MSCI ) and Texas Instruments ( TXN ) have fallen further down the list, or do not meet the 12% expected rate of return threshold and were replaced by MarketAxess Holdings ( MKTX ), Rollins ( ROL ), Charles Schwab ( SCHW ), Sherwin-Williams ( SHW ) and Zoetis ( ZTS ).

Past Performance

The top 15 list for January posted a strong gain of 9.44% last month and continues its strong momentum from the latter part of 2022. The long-term annualized rate of return for the watchlist increases from 11.80% last month to 15.61%. My target rate of return is 12%, and despite the volatility in the market this year I remain optimistic that this watchlist will continue to exceed this goal in the long run.

Top 5 past and present watchlist stocks in January 2023:

• Paramount Global ( PARA ) +37.20%
• Nvidia ( NVDA ) +33.69%
• MarketAxess Holdings (MKTX) +30.46%
• Blackstone ( BX ) +29.34%
• Lithia Motors ( LAD ) +28.55%

None of the top 15 stocks selected in January were amongst the top 5 past and present performing stocks last month. Monolithic Power Systems and Skyworks, that were part of my January list, finished in 6th and 7th place. In total there have been 66 unique dividend stocks selected by this watchlist since September of 2020.

Top 5 Stocks by Total Return since joining the watchlist:

1. Automatic Data Processing ( ADP ) +70.62% (29 months)
2. Tractor Supply ( TSCO ) +65.58% (24 months)
3. Progressive ( PGR ) +59.88% (24 months)
4. Bank of New York Mellon ( BK ) +53.91% (29 months)
5. UnitedHealth Group ( UNH ) +53.71% (24 months)

ADP remains the best watchlist stock albeit the company posted a loss of 5.46% in January. TSCO slides up to 2nd place after a modest gain of 1.34%. PGR pops back into the top 5 list following a gain of 5.20% last month. BK also climbs into the top 5 after posting a gain of 11.93% in January.

Since not all stocks have been on the watchlist for the full 29 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. Best Buy ( BBY ) +4.84% (7 months)
2. Cigna ( CI ) +2.79% (11 months)
3. Tractor Supply ( TSCO ) +2.12% (24 months)
4. Progressive ( PGR ) +1.97% (24 months)
5. Automatic Data Processing ( ADP ) +1.86% (29 months)

Drivers Of Alpha

The watchlist outperformed VIG in January. 12 watchlist stocks outpaced the ETF last month.

• ( MPWR ) +20.63%
• ( SWKS ) +20.34%
• ( SSNC ) +15.92%
• ( MSCI ) +14.27%
• ( BALL ) +13.88%
• ( V ) +10.81%
• ( BBY ) +10.61%
• ( CDW ) +9.77%
• ( TXN ) +8.03%
• ( MA ) +6.74%
• ( FMC ) +6.67%
• ( LOW ) +5.05%

The remaining 3 stocks underperformed VIG.

• ( DPZ ) +1.91%
• ( TSCO ) +1.34%
• ( CI ) -4.43%

Buy-And-Hold Portfolios

The best way to utilize the ideas presented by this watchlist is with a long term buy-and-hold investing approach. I started tracking how such a portfolio would have worked out with one portfolio started at the beginning of 2021 and the other at the beginning of 2022. A third portfolio was kicked off for 2023 and its off to a fast start. Each portfolio assumes you invest equally amongst the chosen 15 stocks for the given month and never liquidate these positions.

The 2021 B&H portfolio performed average in January, posting a gain of 4.96%, outperforming VIG but losing to SPY. The cumulative return since January 2021 for the portfolio is 22.42% compared to 14.87% for VIG and 12.00% for SPY. On an annualized basis the portfolio has a return of 10.20% compared to 6.88% for VIG and 5.59% for SPY. The portfolio holds 54 unique positions, here are the individual returns and allocation as of January 31, 2023.

The 2022 B&H portfolio performed better in January, posting a gain of 7.06%. The portfolio finished 2022 with a loss of -11.97% compared to -9.80% for VIG and -18.16% for SPY. This marginal underperformance in the prior year was erased in the first month of 2023. The cumulative return for the portfolio since January 1, 2022 is -5.76% compared to -7.18% for VIG and -13.01% for SPY. There are a total of 38 unique positions in the portfolio, here are the individual returns and allocation as of January 31, 2023.

The 2023 B&H portfolio matched the return of the January watchlist, +9.44%, and starts with a nice lead on both VIG and SPY. Here are the individual returns and allocation as of January 31, 2023.

My expectations are for this watchlist to produce a long term 12% annualized rate of return. I use this watchlist along with my high yield watchlist to identify investing opportunities that I act on in my personal portfolio.

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 66 stocks that are on this list, 50 (42 last month) have positive total returns and 16 have negative total returns, the average return is 16.40% (9.94% last month). The watchlist has been around for 29 months, the average duration for all 66 stocks is just below 23 months.

For further details see: