TSCO - My Top 15 High Growth Dividend Stocks For July 2023

2023-07-03 11:20:46 ET

Summary

• The watchlist from June posted a gain of 8.91% last month, outperforming the SPDR S&P 500 Trust ETF by 2.43% and Vanguard's Dividend Appreciation ETF by 2.41%.
• The top 15 dividend growth stocks for July offer an average dividend yield of 1.66% and appear about 34% undervalued based on dividend yield theory.
• Since inception, September 2020, the watchlist is beating VIG by 4.20% and SPY by 3.81%.

Quality Stocks

After a sour showing in May the watchlist comes out swinging in June. The 15 chosen stocks from last month collectively posted a gain of 8.91%, crushing the SPDR S&P 500 Trust ETF ( SPY ) by 2.43% and Vanguard's Dividend Appreciation ETF ( VIG ) by 2.41%. Year-to-date my watchlist is up 12.48%, compared to 8.01% for VIG and 16.80% for SPY.

While SPY continues to dominate on the year my watchlist is still ahead since inception. The long-term, 34 month, annualized return for my watchlist is 14.35% compared to 10.54% for SPY and 10.16% for VIG.

My goal is not to beat SPY or VIG but to generate a long-term rate of return of at least 12%. Thus far the watchlist is achieving this goal but continued volatility this year pushes the long-term return above and below this target.

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 July offer an average dividend yield of 1.66%. Collectively, they have increased dividend payments at a rate of 29.49% 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 July 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 132 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.

Watchlist For July 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 3 changes to the top 15 list from the prior month. Intuit ( INTU ), Mastercard ( MA ) and MarketAxess Holdings ( MKTX ) have fallen further down the list, or do not meet the 12% expected rate of return threshold and were replaced by Allegion PLC ( ALLE ), Dollar General ( DG ) and Kroger ( KR ).

Past Performance

The top 15 list for June posted a gain of 8.91% and sees its long-term alpha over both benchmarks improve. The long-term annualized rate of return for the watchlist increased from 11.31% last month to 14.35%. 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 June 2023:

• Lithia Motors ( LAD ) +30.36%.
• Sirius XM Holdings ( SIRI ) +27.25%.
• Microchip Technology ( MCHP ) +19.04%.
• Deere and Company ( DE ) +17.48%.
• Domino's Pizza ( DPZ ) +16.72%.

Three of the top 15 stocks selected in June were amongst the top 5 past and present performing stocks last month; Sirius XM Holdings, Microchip Technology and Domino's Pizza. In total, there have been 70 unique dividend stocks selected by this watchlist since September of 2020.

Top 5 Stocks by Total Return since joining the watchlist:

1. Nvidia ( NVDA ) +218.25% (27 months).
2. Automatic Data Processing ( ADP ) +68.01% (34 months).
3. Tractor Supply ( TSCO ) +62.07% (29 months).
4. Cintas ( CTAS ) +60.11% (29 months).
5. KLA Corporation ( KLAC ) +58.24% (26 months).

Since not all stocks have been on the watchlist for the full 34 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. Microchip Technology ((MCHP)) +19.04% (1 month).
2. Nvidia ((NVDA)) +4.38% (27 months).
3. Best Buy ( BBY ) +2.32% (12 months).
4. Rollins ( ROL ) +2.06% (17 months).
5. KLA Corporation ( KLAC ) +1.78% (26 months).

Drivers Of Alpha

The watchlist outperformed VIG in June. Ten watchlist stocks outpaced the ETF last month.

• ((SIRI)) +27.25%.
• ((MCHP)) +19.04%.
• ((DPZ)) +16.72%.
• ( CI ) +13.94%.
• ( SSNC ) +10.26%.
• ((INTU)) +9.32%.
• ((MA)) +7.75%.
• ( SCHW ) +7.57%.
• ( WRB ) +7.17%.
• ( SWKS ) +6.94%.

The remaining 5 stocks underperformed VIG.

• ( ZTS ) +5.64%.
• ((TSCO)) +5.49%.
• ((FMC)) +0.81%.
• ( MSCI ) -0.26%.
• ((MKTX)) -4.03%.

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 70 stocks that are on this list, 51 (46 last month) have positive total returns and 19 have negative total returns, the average return is 19.01% (11.04% last month). The watchlist has been around for 34 months, the average duration for all 70 stocks is 26.57 months.

Dividend Analysis for New Stocks

Below are a 7 year dividend yield theory chart, a dividend history chart and dividend growth table for the 3 new stocks on the watchlist this month.

First up is Dollar General.

Here is Allegion PLC.

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