WTRG - My Top 15 High Growth Dividend Stocks For January 2024

2024-01-02 00:54:37 ET

Summary

• The SPDR S&P 500 ETF was up 4.57% in December, Vanguard's Dividend Appreciation ETF was up 4.13%, and my watchlist beat both with a return of 9.52%.
• The top 15 dividend growth stocks for January 2024 offer an average dividend yield of 1.63% and appear to be about 30% undervalued based on dividend yield theory.
• Since its inception in September 2020, the watchlist has been rocking a cool 14.53% annualized return, beating VIG by 4.04% and SPY by 3.08%.

Quality Stocks

The SPDR S&P 500 ETF Trust ( SPY ) posted a 4.57% return in December, ending the year on a very strong note. Vanguard's Dividend Appreciation Index Fund ETF Shares ( VIG ) locked in a slightly lower gain of 4.13% last month. My watchlist outperformed both, posting a very strong gain of 9.52%. The final 2023 returns are 20.89% for my watchlist, 14.50% for VIG, and 26.18% for SPY.

While SPY beat my watchlist this year, since inception, the watchlist remains dominant, outperforming VIG by 3.08% and SPY by 4.04% 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%. Following the strong return in December, the watchlist is once again sitting ahead of this target.

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

The top 15 dividend growth stocks for January 2024 offer an average dividend yield of 1.63%. Collectively, they have increased dividend payments at a rate of 28.37% 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 suggest considering two approaches to dividend investing. The first involves dollar-cost averaging into a diversified portfolio comprising at least 10-20 high-quality dividend-paying stocks spanning various sectors and industries. By adopting a dollar-cost averaging strategy, you mitigate the risk associated with attempting to time the market. Over an extended period, this method allows you to acquire shares at market highs, lows, and in-between, ultimately establishing an average cost basis situated in the middle.

The second method introduces a slightly higher level of risk. It entails investing in undervalued stocks while still adhering to a dollar-cost averaging strategy. In this approach, you diversify across a minimum of 10-20 distinct, high-quality companies spanning multiple sectors and industries. The increased risk stems from the possibility that your valuation methodology may prove inaccurate. However, by spreading investments across multiple stocks, the likelihood of correctly identifying undervalued opportunities improves. The potential upside resulting from accurate selections may well outweigh any underperformance stemming from less successful picks.

Watchlist Criteria

The criteria used to determine which stocks are included in my high-growth dividend stock watchlist remain unchanged for January 2024. 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 131 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 January 2024

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. Bank of America ( BAC ), Discover Financial Services ( DFS ) Charles Schwab ( SCHW ), and Tractor Supply ( TSCO ) have fallen further down the list, or do not meet the 12% expected rate of return threshold and were replaced by Mastercard ( MA ), MarketAxess Holdings ( MKTX ), NIKE ( NKE ) and Essential Utilities ( WTRG ).

Past Performance

The top 15 list from December posted a gain of 9.52% and sees its long-term alpha over both benchmarks improve. The long-term annualized rate of return for the watchlist increased from 11.76% last month to 14.53%. My target rate of return is 12%, and despite the volatility in the market this year, the watchlist is once again sitting above its target.

Top 5 past and present watchlist stocks in December 2023:

• Lithia Motors ( LAD ) +23.33%
• MarketAxess Holdings +21.96%
• Discover Financial Services +20.86%
• Advance Auto Parts ( AAP ) +20.16%
• Allergen PLC +19.87%

One of the top 15 stocks selected from the month of December was amongst the top 5 performing stocks last month, Discover Financial Services. In total, there have been 74 unique dividend stocks selected by this watchlist since September 2020.

Top 5 Stocks by Total Return since joining the watchlist:

1. NVIDIA ( NVDA ) +273.63% (33 months).
2. Cintas ( CTAS ) +95.15% (35 months).
3. KLA Corporation ( KLAC ) +90.65% (32 months).
4. Progressive ( PGR ) +87.19% (35 months).
5. Costco ( COST ) +85.41% (40 months).

Since not all stocks have been on the watchlist for the full 40 months of their 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. Discover Financial Services +5.91% (4 months)
2. Bank of America +4.31% (4 months)
3. NVIDIA +4.07% (33 months)
4. Microchip Technology ( MCHP ) +2.77% (7 months)
5. KLA Corporation +2.04% (32 months)

Drivers Of Alpha

The watchlist outperformed VIG in December. Thirteen watchlist stocks outpaced the ETF last month.

• ((DFS)) +20.86%
• ( SIRI ) +16.88%
• ( CI ) +14.45%
• ((SCHW)) +12.20%
• ( ZTS ) +11.72%
• ( TXN ) +11.62%
• ((BAC)) +10.43%
• ( SSNC ) +8.62%
• (MSCI) +8.60%
• ((MCHP)) +8.08%
• ( ROL ) +7.19%
• ((TSCO)) +5.92%
• ( DPZ ) +5.24%

The remaining 2 stocks underperformed VIG.

• ( V ) +1.43%
• ( EOG ) -0.50%

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, 61 (55 last month) have positive total returns and 13 have negative total returns, the average return is 30.86% (22.07% last month). The watchlist has been around for 40 months, and the average duration for all 74 stocks is 31.04 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 Mastercard.

Up next is MarketAxess Holdings.

Up next is Nike.

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