POOL - Top 10 Dividend Growth Stocks - February 2023

Summary

• This article will focus on DGI stocks that are likely to provide a high rate of dividend growth rather than a high current yield.
• High-growth dividend stocks are particularly suited for folks who are in the accumulation phase and are several years away from retirement.
• We use our proprietary models to rate quantitatively as well as qualitatively and select the top ten names out of an initial list of nearly 400 dividend stocks.
• We also publish a monthly series titled "5 Relatively Safe and Cheap DGI Stocks," which focuses on moderate to high current income-favoring high-yield names.

Irrespective of the market's short-term movements, as long-term DGI investors, we need to pay attention to the quality of companies that we invest in and the price we pay. In this article, our focus is on selecting and highlighting stocks that have been growing their dividends at a rapid pace and, more than likely will continue to do so in the future for at least the next 3-5 years. However, such stocks usually do not pay very high current yields.

If you need higher yields, please read the most recent article from our monthly series titled " 5 Relatively Safe and Cheap DGI ," which focuses on moderate to high current income-favoring high-yield names.

Note: Please note that the stocks shortlisted and highlighted in this article are not buy recommendations per se but rather candidates for further research. Please use your due diligence, considering your personal goals and risk tolerance, before making any investments. Also, some of the sections in the article (Introduction, Selection methodology, etc.) will be repetitive from month to month for the benefit of the new readers. Regular readers could skip such sections.

Why High Growth Dividend Stocks?

There are two types of dividend stocks that a DGI investor can choose from depending upon their individual situation, goals, and investing time horizon:

• High Growth Low Yield [HGLY]
• Low Growth High Yield [LGHY].

As the names suggest, the HGLY category would have stocks that offer a high rate of dividend growth but usually a low current yield. These stocks would normally have low payment ratios, manageable levels of debt, and rapidly rising earnings.

On the other hand, LGHY-type of stocks would offer a high current yield (generally 3% and higher) but a lower rate of dividend growth. Generally speaking, these companies are more mature and stable businesses that have their hyper-growth period in the rearview but still grow modestly over time to support a low but stable growth in dividends.

Obviously, there will be stocks that fit somewhere in between these two categories, for example, medium growth and medium current yield.

So, who should own HGLY-type stocks? Basically, anyone who is in the accumulation phase and does not need the income currently and/or in the next five to ten years should own some high-growth dividend stocks. In addition, folks, including retirees, who have a large investment capital that generates more income than they need currently (for example, 1.5x or 2x their income needs) should invest at least partially in HGLY type of stocks.

Selection Criteria

We will draw upon our original current month's data set, taken from our other DGI series (5 Relatively Safe and Cheap DGI). We will then apply additional criteria to filter out stocks that have provided a high rate of dividend growth in the recent past and are likely to continue on that path for the foreseeable future.

To get a complete spreadsheet of this dataset, please see our original article. For the sake of clarity, we will list the original filtering criteria below:

• Market cap > $10 billion ($9 billion in a down market)
• Dividend yield > 1.0% (some exceptions are made to include high quality but lower yielding companies)
• Daily average volume > 100,000
• Dividend growth past five years >= 0.
• Preferably, a minimum of 5 years of positive dividend growth.

Additional Criteria:

A vast majority of these stocks have raised their dividend payouts for five years or more. However, now we will filter out stocks that have increased their dividend payouts by an annual rate of 8% or more. In addition, we will also consider stocks that may not have provided a consistent increase but overall have provided a cumulative 40% increase in payouts in the last five years.

We will now use the following additional criteria to filter out stocks that would fit the mold of High Growth DGI stocks.

• The payment Ratio (on a cash-flow basis or EPS basis) is less than 80%
• 5-Year Dividend growth is at least 8% or greater. This is in line with the growth rate of the benchmark fund, Vanguard Dividend Appreciation ETF ( VIG ).
• Chowder number (5-YR Dividend-growth plus the Dividend-yield) >= 10.

After we apply these criteria, we are left with 223 stocks on our list. Please note that at this stage, we have applied our base criteria, but we will now perform additional filtering to get to the best candidates.

We know that for a stock to grow its dividend rapidly, it must grow its earnings at a very high pace as well. Without growth in earnings (earnings per share – EPS), the company cannot grow its dividends for long. Sure, some companies may try to do it by taking on more debt or cutting costs, or spending less on R&D, but that cannot be sustained very long before it starts causing wider issues. So, our focus ought to be on earnings growth.

In our spreadsheet, we will add four more columns of data for each of the stocks:

• EPS (earnings per share) Rating
• Last Qtr EPS change % (actual)
• Current Qtr EPS change % (est.)
• Current year EPS change % (est.).

We will now assign weights to these four sets of data for each stock and add them to the original "Dividend Safety Quality Score" to come up with a modified Quality Score tilted in favor of high dividend growth stocks. We will call this column a High-Growth Quality-Score [HGQS]. We will also import the 5-Yr Average Dividend Yield for each stock.

Note: The Dividend-Safety Quality Score was calculated and taken from the original spreadsheet, as attached in our previous article (5 Relatively Safe and Cheap DGI Stocks for Nov 2022).

The factors and data that were considered to calculate the original Dividend Safety Quality Score were:

• Current Yield
• Dividend growth history (number of years of dividend growth):
• Payout ratio – Preferably based on Free Cash Flow.
• Past five-year and 10-year dividend growth
• EPS growth (average of previous five years of growth and expected next 3-5 years' growth)
• Chowder number – the sum of the 5-yr dividend growth rate and the current yield
• Debt/equity and Debt/asset ratios
• S&P's credit ratings (Standard & Poor’s Global Ratings)
• Distance from 52-week high (current price minus 52-wk high price)
• Sales or Revenue growth for the past five years.

Note: All tables in this article are created by the author unless explicitly specified. The stock data have been sourced from various sources such as Seeking Alpha, Yahoo Finance, GuruFocus, IBD, and CCC-List (dripinvesting).

Narrowing Down The List To 40 Stocks

From the above list of 223 stocks, we will select 40 stocks based on the following methodology.

1. Top 10 stocks based on the highest HG-Quality-Score
2. Top 10 stocks based on the highest 5-yr Dividend Growth
3. Top 10 stocks based on the excess yield over and above 5-YR Average Dividend Yield.
4. Top 10 stocks based on current discount from 52-week highs.

We will now remove the duplicates from this list as many stocks qualify based on multiple criteria.

Appeared two times: BAX, CI, EOG , LEN, NRG (5 duplicates)

Appeared three times: AAP, PXD (4 duplicates)

We are now left with 31 (40-9) names.

Next, we will remove any stock that has an HG-Quality Score of less than 60.

This check will remove five entries (BALL, SIRI, BAX, BN, and CGNX) from the list, leaving us 26 names.

We will also remove any names where the revenue growth (over the last five years) has been negative. There is none on this list.

Finally, we will also remove any over-concentration from one sector or any one industry segment.

We have several names from the "Oil Production/Exploration." They are CTRA, EOG, PXD, IMO, CNQ, and FANG. We will keep the top two (CTRA and EOG) and remove the others (PXD, IMO, CNQ, and FANG). For similar reasons (duplication within industry segment), we also remove MAS, LEN, CM, ALLY, and AMH.

We are finally left with 17 names, which are presented in the table below:

Table 1: Top 17 High Growth DGI Stocks of the month:

Final Step: Selection Of Top 10 High Growth DGI Stocks

To a certain extent, this step is a bit subjective and, to that extent, is based on our perceptions. The readers could certainly differ from some of our selections, and they may come up with their own set of ten companies appropriate for their goals, but they should try to keep the group diversified among different sectors or industry segments. Nonetheless, we describe below how we go about selecting these ten stocks for the month.

• As a first step, we will sort out our list of the above 17 stocks on the basis of sector-Industry-segment and then in descending order of HG Quality-score.
• From top to bottom, we will select one stock from each industry segment. We may select either the top or the second one from any one industry segment.
• We may give some weightage to how the stock is priced currently. This is a mostly subjective decision.

Here are our top 10 selections this month.

February List: ( CTRA ), ( CSL ), ( NTR ), ( LOW ), ( DE ), ( RF ), ( MPWR ), ( CI ), ( AAP ), ( INVH ).

January List: ( TSM ), ( CTRA ), ( CSL ), ( LOW ), ( AVGO ), ( LEN ), ( DE ), ( CI ), ( TROW ), ( POOL )

List of stocks that are common in the current and previous month lists: CTRA, CSL, LOW, DE, and CI.

We would like to mention that many stocks would repeat from month to month, but we will also see new stocks making it to the top and replacing some old ones.

Note: Please note that if a stock was in a previous month's list but is no longer selected in the current list, it does not mean the stock is no longer a good choice. If the stock has still scored an HG-Quality score of >70, we think it could still be at least a 'hold' (if not a 'buy'). The purpose here is to simply highlight the top candidates every month. Please perform further research and your due diligence before making any buy or sell decisions.

Table 2:

Note: In the case of CTRA, the actual dividend in the year 2022 was $2.49 per share, which at the current price, yields roughly 9.90%. However, in the table above, we are showing a much lower yield since we are excluding the special or variable dividend. Most public websites, including Seeking Alpha, show the same lower yield. Also, per the company website, it describes the most recent $0.68 dividend as a $0.15 regular/base quarterly dividend and $0.53 as a variable dividend. It is highly likely that the company will keep paying the variable dividend in the future, but the amount is not fixed. Please use your own judgment in this regard.

Past Performance

If we were to compare the performance of these ten stocks and compare with the S&P500 and benchmark ETF VIG, the results would be quite encouraging. We assume that our model portfolio was invested equally in the ten selected stocks from Table 2. The performance comparison is for the period from Jan-01-2010 to Feb-10-2023. Also, please keep in mind that past performance is no guarantee for the same level of success in the future. Also, please note that one of the stocks, INVH, did not have sufficient history, so it could not be included prior to 2018.

Chart-1:

Performance of the Previous Month's selections:

(From Jan.13, 2022, to Feb. 10, 2023.)

Although one month is too short to judge the performance of any portfolio; however, it may be worthwhile to compare the performance every month, and that will allow us to calculate the yearly performance of the strategy.

Table-3:

How To Structure A Portfolio Based On This Series

Though it would depend a great deal on your personal goals, risk tolerance, investment methodology, and choices; however, if you wish to make a portfolio based on this monthly series, here is one way to do it:

• • Make a portfolio budget and provision to have a maximum of 25 stocks over time.
  • Divide your capital (current + future) into 25 equal parts.
  • The first month, buy the 10 (or less if you desire) positions based on the 10 top stocks for that month.
  • From the next month onwards, check for the new stocks appearing in the top 10 list that are not part of your portfolio, and add (as many as your process and budget allow).
  • Repeat step 4 until you reach the max 20 or 25 positions.
  • When you have reached the max 20 or 25 positions, and you have no more capital to add, look for new stocks that have made it to the top 10 list and see if anyone of them should be added based on your further research. If you decide to add a position, then you need to find a position that you would like to drop and replace with the new one. You can find an existing position to drop that has not made it to the top 10 during the last several months (for example, during the last six months).
  • It may also be recommended to monitor your positions periodically, preferably monthly. Also, make sure that you do not overweight any particular sector or industry segment.

Concluding Remarks

In this article, we primarily focus on high-growth dividend stocks, which are likely to offer a high rate of dividend growth but may not offer high current yields. So, this list may not be appropriate for everyone, but rather for a more selective audience.

Based on our rule-based filtering process, we narrowed down the list to roughly 20 stocks. As a final step, we subjectively select ten stocks that form a diversified group and will likely offer high growth at reasonable values.

The top 10 list yields 2.15%, which is slightly higher than 1.90% from the benchmark Vanguard fund, VIG. Moreover, the 5-yr dividend growth for this group is much higher (>40%) compared to 8% for VIG. The larger group of 17 stocks yields a bit higher at 2.34%. Both groups are highly diversified into many sectors and industry segments.

Disclosure: I/we have a beneficial long position in the shares of ABT, ABBV, CI, JNJ, PFE, NVS, NVO, AZN, UNH, CL, CLX, UL, NSRGY, PG, TSN, ADM, MO, PM, KO, PEP, EXC, D, DEA, DEO, ENB, MCD, BAC, PRU, UPS, WMT, WBA, CVS, LOW, AAPL, IBM, CSCO, MSFT, INTC, T, VZ, CVX, XOM, VLO, ABB, ITW, MMM, LMT, LYB, RIO, O, NNN, WPC, ARCC, ARDC, AWF, CHI, DNP, EVT, FFC, GOF, HQH, HTA, IFN, HYB, JPC, JPS, JRI, LGI, KYN, MAIN, NBB, MCI, NLY, OHI, PDI, PCM, PTY, RFI, RNP, RQI, STAG, STK, USA, UTF, TLT either through stock ownership, options, or other derivatives.

For further details see: