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

Summary

• I present my top 15 high-growth dividend stocks to consider during the month of March.
• The watchlist posted loss of 2.94% in February, finishing behind VIG and SPY on the month.
• Since inception, September 2020, the watchlist is outperforming VIG by 5.54% and SPY by 6.99% on an annualized basis.

Quality Stocks

Investors were brought back to reality after the equity market lost steam in February, ending the new year rally short. However, the SPDR S&P 500 Trust ETF ( SPY ) is still up 3.62% on the year, Vanguard's Dividend Appreciation ETF ( VIG ) is barely above water with a gain of 0.08% and my watchlist has a decent positive cushion of 6.22%.

Following February the watchlist sees its long-term annualized return fall to 13.78%, but still remain comfortably above my target of 12%.

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 March offer an average dividend yield of 1.55%. Collectively, they have increased dividend payments at a rate of 31.14% during the last 5 years. Based on dividend yield theory, these 15 stocks are about 32% 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 March 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 128 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 March 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-valuation for Cigna ( CI ) is 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 4 changes to the top 15 list from the prior month. CDW Corporation ( CDW ), FMC Corporation ( FMC ), Charles Schwab ( SCHW ) and Skyworks Solutions ( SWKS ) have fallen further down the list, or do not meet the 12% expected rate of return threshold and were replaced by Best Buy ( BBY ), EOG Resources ( EOG ), Monolithic Power ( MPWR ) and MSCI ( MSCI ).

Past Performance

The top 15 list for February posted a loss of 2.94% but continues to maintain its long term alpha over both benchmarks. The long-term annualized rate of return for the watchlist shrinks from 15.61% last month to 13.78%. 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 February 2023:

• West Pharma ( WST ) +19.36%
• Nvidia ( NVDA ) +18.83%
• Monolithic Power ( MPWR ) +13.53%
• Progressive ( PGR ) +5.26%
• FedEx ( FDX ) +4.83%

None of the top 15 stocks selected in February were amongst the top 5 past and present performing stocks last month. On a positive note, all 5 of the best performing stocks are included in some of the buy-and-hold portfolios. In total there have been 67 unique dividend stocks selected by this watchlist since September of 2020.

Top 5 Stocks by Total Return since joining the watchlist:

1. Nvidia ( NVDA ) +74.61% (23 months)
2. Tractor Supply ( TSCO ) +70.17% (25 months)
3. Progressive ( PGR ) +68.29% (25 months)
4. Automatic Data Processing ( ADP ) +66.10% (30 months)
5. CDW ( CDW ) +57.52% (25 months)

Since not all stocks have been on the watchlist for the full 30 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 ) +3.37% (8 months)
2. Nvidia ( NVDA ) +2.45% (23 months)
3. Tractor Supply ( TSCO ) +2.15% (25 months)
4. Progressive ( PGR ) +2.10% (25 months)
5. Cigna ( CI ) +1.87% (12 months)

Drivers Of Alpha

The watchlist underperformed VIG in February. 7 watchlist stocks outpaced the ETF last month.

• ( CDW ) +3.56%
• ( TSCO ) +2.77%
• ( SWKS ) +2.30%
• ( SCHW ) +0.96%
• ( ZTS ) +0.91%
• ( LOW ) -1.20%
• ( SSNC ) -2.40%

The remaining 8 stocks underperformed VIG.

• ( ROL ) -2.94%
• ( FMC ) -2.99%
• ( MA ) -4.13%
• ( V ) -4.27%
• ( MKTX ) -5.97%
• ( SHW ) -6.19%
• ( CI ) -7.76%
• ( DPZ ) -16.71%

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 again performed average in February, posting a loss of 2.61%, outperforming VIG but losing to SPY. The cumulative return since January 2021 for the portfolio is 19.22% compared to 11.72% for VIG and 9.19% for SPY. On an annualized basis the portfolio has a return of 8.45% compared to 5.25% for VIG and 4.14% for SPY. The portfolio holds 55 unique positions, here are the individual returns and allocation as of February 28, 2023.

The 2022 B&H portfolio performed slightly worse in February, posting a loss of 3.10%. 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, however the less than stellar return in February has given up some of this freshly attained lead. The cumulative return for the portfolio since January 1, 2022 is -8.68% compared to -9.72% for VIG and -15.20% for SPY. There are a total of 40 unique positions in the portfolio, here are the individual returns and allocation as of February 28, 2023.

The 2023 B&H portfolio matched the return of the January watchlist, +9.44%, and started with a nice lead on both VIG and SPY. That lead was extended during February as the portfolio finished the month with a loss of just 2.38% compared to a loss of 2.74% for VIG and a loss of 2.51% for SPY. There are a total of 14 unique positions in the portfolio, here are the individual returns and allocation as of February 28, 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 67 stocks that are on this list, 49 (50 last month) have positive total returns and 17 have negative total returns, the average return is 13.97% (16.40% last month). The watchlist has been around for 30 months, the average duration for all 67 stocks is 23.64 months.

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