V - My Top 15 High Growth Dividend Stocks For September 2022
Summary
- I present my top 15 high-growth dividend stocks to consider during the month of September.
- The watchlist posted a loss of 4.88% in August and is now down 12.85% year-to-date.
- Since its inception in September 2020, the watchlist is outperforming VIG by 2.87% and SPY by 3.27% on an annualized basis.
Quality Stocks
If we only had finished the month a week earlier, the story for August would have been much different. But in the market you have to take the punches as they come. As a long term dividend investor, market weakness should be seen as an opportunity rather than punishment.
My watchlist for August lost 4.88%, underperforming Vanguard's Dividend Appreciation ETF ( VIG ) that lost 3.45% and the SPDR S&P 500 Trust ETF ( SPY ) that lost 4.08%. Since inception, September 2020, the watchlist is still generating alpha over both benchmarks but the gap has shrunk after August. Annualized alpha over VIG drops from 3.96% to 2.87%, and annualized alpha over SPY drops from 4.01% to 3.27%. Following the poor results in August the long term annualized rate of return for the watchlist falls below my target of 12% (11.21%). The best thing to do after a losing month is to shake off the dust and start identifying the largest opportunities .
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 September offer an average dividend yield of 2.17%. Collectively they have increased dividend payments at a rate of 32.43% during the last 5 years. Based on dividend yield theory these 15 stocks are about 39% 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 September 2022. 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 112 stocks for the month of September 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 September 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 September 2022
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. Collectively these 15 stocks offer a dividend yield of 2.17%.
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 undervaluations for Cigna ( CI ) and Advance Auto Parts ( AAP ) are overstated due to very fast recent dividend growth by both companies. Dividend yield theory works best for companies with stable and consistent dividend growth.
There are two changes to the top 15 list from the prior month. Blackstone ( BX ) and Charles Schwab ( SCHW ) fall further down the list and replacing them in the top 15 are Mastercard ( MA ) and Visa ( V ).
Past Performance
August was the 5th month this year the watchlist underperformed VIG, and the 4th month of underperformance to SPY. On a year-to-date basis the watchlist is still ahead of both benchmarks, with 0.21% of alpha over VIG and 3.32% of alpha over SPY. The long term annualized rate of return for the watchlist falls from 14.68% last month to 11.21% after August. My target rate of return is 12%, and despite the volatility in the market this year I remain optimistic this watchlist will meet this goal in the long run.
| Month |
| Watchlist |
| All |
| VIG |
| SPY |
| 1 Month |
| -4.88% |
| -4.56% |
| -3.45% |
| -4.08% |
| 3 Month |
| -3.60% |
| -3.68% |
| -3.31% |
| -3.89% |
| 6 Month |
| -4.12% |
| -7.52% |
| -5.55% |
| -8.82% |
| 1 Year |
| -4.38% |
| -10.51% |
| -7.22% |
| -11.23% |
| 2020 |
| 6.27% |
| 6.15% |
| 9.09% |
| 7.94% |
| 2021 |
| 33.53% |
| 31.55% |
| 23.75% |
| 28.76% |
| 2022 |
| -12.85% |
| -16.48% |
| -13.06% |
| -16.17% |
| Since Inception |
| 23.67% |
| 16.63% |
| 17.37% |
| 16.50% |
| Annualized |
| 11.21% |
| 8.00% |
| 8.34% |
| 7.93% |
Top 5 past and present watchlist stocks in August 2022:
- Progressive ( PGR ) +6.60%
- Deere Co. ( DE ) +6.43%
- Charles Schwab ( SCHW ) +3.06%
- Cigna ( CI ) +2.94%
- TJX Companies ( TJX ) +2.42%
Two of the top 5 watchlist stocks from August were part of my watchlist; SCHW and CI. Despite selecting 2 of the 5 best performing watchlist stocks last month, overall the watchlist performed poorly due to other selections as you will see in the next section. In total there have been 65 unique dividend stocks selected by this watchlist since September of 2020.
Top 5 Stocks by Total Return since joining the watchlist:
- Automatic Data Processing ( ADP ) +83.01% (24 months)
- UnitedHealth Group ( UNH ) +58.94% (19 months)
- Northrop Grumman ( NOC ) +43.68% (24 months)
- Progressive ( PGR ) +43.59% (19 months) NEW
- Costco ( COST ) +42.09% (24 months)
ADP remains the best watchlist stock after adding 1.36% in August. UNH posted a loss of 4.24% last month but retains the 2nd position. NOC added 0.17% and slides into third place. PGR, the best performing watchlist stock last month, climbs back into the top 5 list. Rounding out the top 5 is COST that lost 3.55% in August. CDW drops out of the top 5 list after a 5.71% loss last month.
Since not all stocks have been on the watchlist for the full 24 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.
- Best Buy ( BBY ) +4.13% (2 months)
- Cigna ( CI ) +3.13% (6 months)
- Automatic Data Processing ( ADP ) +2.55% (24 months)
- UnitedHealth Group ( UNH ) +2.47% (19 months)
- Progressive ( PGR ) +1.92% (19 months)
Drivers Of Alpha
The watchlist underperformed VIG in August. 7 watchlist stocks outpaced the ETF last month.
- ( SCHW ) +3.06%
- ( CI ) +2.94%
- ( LOW ) +1.36%
- ( MS ) +1.09%
- ( FMC ) -2.72%
- ( TROW ) -2.81%
- ( TSCO ) -2.87%
The remaining 8 stocks underperformed VIG.
- ( HD ) -3.53%
- ( DPZ ) -5.16%
- ( SSNC ) -5.43%
- ( MSCI ) -6.44%
- (BX ) -7.97%
- ( BBY ) -8.18%
- ( AAP ) -12.90%
- ( BALL ) -23.71%
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. 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 poorly in August, losing 4.10% and slightly underperforming SPY and VIG. The cumulative return since January 2021 for the portfolio is 11.32% compared to 7.58% for VIG and 7.93% for SPY. On an annualized basis the portfolio has a 6.65% return compared to 4.48% for VIG and 4.69% for SPY. The portfolio holds 54 unique positions with the largest position being:
Here are the 5 best performing positions:
The 2022 B&H portfolio performed worse in August, losing 4.93%. The year-to-date return is -15.96% compared to -13.06% for VIG and -16.17% for SPY. There are a total of 38 unique positions in the portfolio due to a high turnover rate on the watchlist because of all the market volatility.
Here are the 5 largest positions:
Here are the 5 best performing positions:
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.
For further details see:
My Top 15 High Growth Dividend Stocks For September 2022