2023-07-15 09:00:00 ET
Summary
- The article presents a monthly series of 10 top-ranked dividend growth stocks for further research and potential investment.
- The stocks are ranked based on quality scores, with tie-breaking metrics including dividend safety scores, credit ratings, and forward dividend yield. The top three stocks for this month are Visa, UnitedHealth, and Intercontinental Exchange.
- The article also provides key metrics and fair value estimates for each stock, and suggests that Tractor Supply Company passes all selection criteria for adding new positions to the author's DivGro portfolio.
In my monthly series, 10 Dividend Growth Stocks , I rank a selection of Dividend Radar stocks and present the ten top-ranked stocks for further research and possible investment. Dividend Radar is a weekly automatically generated spreadsheet of dividend growth [DG] stocks with dividend increase streaks of five or more years.
To look for interesting candidates, I apply different screens every month to highlight different aspects of dividend growth investing. For example, this month, I'm focusing on quality, valuation, growth, and performance.
I do a quality assessment of stocks and assign a quality score to each Dividend Radar stock. To rank stocks, I sort them in descending order by quality score and use tie-breaking metrics when necessary.
This month, I'm presenting high-quality, discounted stocks with high growth rates and high 5-year trailing total returns. Every stock trades at least 10% below my risk-adjusted Buy Below prices.
Screening and Ranking
The latest Dividend Radar (dated July 14, 2023) contains 727 stocks. Of these, 218 pass my growth rate screen, 272 pass my TTR screen, and 142 pass my valuation screen. Only 11 stocks pass all these screens.
This month, I used four different screens: quality, valuation, growth, and performance.
Quality Screen
I use a variat ion of DVK Quality Snapshots to assess dividend quality . My system uses six widely used quality indicators from independent sources and assigns 0-5 points to each quality indicator, for a maximum quality score of 30 points.
For this month's article, I screened for stocks with quality scores in the range of 21-30.
Valuation Screen
I use a survey approach to estimate fair value [FV], collecting fair value estimates and price targets from several online sources such as Portfolio Insight, Morningstar, and Finbox. Additionally, I estimate fair value using each stock's five-year average dividend yield. With up to 11 estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my FV estimate.
My risk-adjusted Buy Below prices allow premium valuations for the highest-quality stocks but require discounted valuations for lower-quality stocks:
Created by the author
My Buy Below prices recognize that the highest-quality stocks rarely trade at discounted valuations. As a dividend growth investor with a long-term investment horizon, I'm more interested in owning quality stocks than getting a bargain on lower-quality stocks.
For this month's article, I screened for stocks trading at least 10% below my risk-adjusted Buy Below prices.
Growth Screen
In The April edition of my 10 Dividend Growth Stocks series, I used a compound annual growth [CAGR] screen to look for growth rates of at least 10%. The screen blends 5-year CAGRs for dividends, earnings per share, and total revenue:
average(minimum(D,E,R),median(D,E,R)) ? 10%
where:
• D = 5-year dividend growth rate
• E = 5-year earnings growth rate
• R = 5-year revenue growth rate
Blending the three 5-year CAGRs in this way gives a conservative projection of future growth. Essentially, the blending formula ignores the highest of the CAGRs and averages the lowest and middle CAGR.
For this month's article, I screened for stocks with 5-year CAGRs of at least 10% .
Performance Screen
Total return is a good measure of an investment’s overall performance. The total return of an investment is its rate of return over a given period and includes capital appreciation and dividends.
I use a 5-year trailing total return [TTR] to measure each stock's performance.
For this month's article, I screened for stocks with 5-year TTRs of at least 10% .
Ranking Candidates
To rank candidates, I sort them in descending order by quality scores and using the following tie-breaking metrics:
- Simply Safe Dividends Dividend Safety Scores
- S&P Global Credit Ratings
- Forward Dividend Yield
Each stock's Rank is shown in the tables that follow.
Top 10 Dividend Growth Stocks for July
Here are this month's ten top-ranked DG stocks in rank order:
Top 10 Dividend Growth Stocks for July 2023 |
Created by the author |
Click here to review the June Edition of 10 Dividend Growth Stocks . |
I own the six highlighted stocks in my DivGro portfolio.
The following company descriptions are my summary of company descriptions sourced from Finviz.
1. Visa ( V )
Headquartered in San Francisco, California, V operates as a payments technology company worldwide. The company facilitates commerce through the transfer of value and information among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. V provides its services under the Visa, Visa Electron, Interlink, V PAY, and PLUS brands.
2. UnitedHealth ( UNH )
Founded in 1974 and based in Minnetonka, Minnesota, UNH is a diversified health and well-being company with core capabilities in clinical expertise, advanced technology, and data and health information. The company provides medical benefits to customers in the United States and in more than 125 other countries.
3. Intercontinental Exchange ( ICE )
ICE, together with its subsidiaries, operates regulated exchanges, clearing houses, and listings venues for commodity, financial, fixed-income, and equity markets in the United States and internationally. It operates through three segments: Exchanges, Fixed Income and Data Services, and Mortgage Technology. ICE was founded in 2000 and is headquartered in Atlanta, Georgia.
4. Home Depot ( HD )
Founded in 1978 and based in Atlanta, Georgia, HD is a home improvement retailer that sells an assortment of building materials, home improvement products, and lawn and garden products. HD provides installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me, and professional customers.
5. Abbott Laboratories ( ABT )
ABT discovers, develops, manufactures, and sells healthcare products worldwide. The company also provides blood and flash glucose monitoring systems. The company operates in four segments: Established Pharmaceutical Products; Diagnostic Products; Nutritional Products; and Cardiovascular and Neuromodulation Products. ABT was founded in 1888 and is headquartered in Abbott Park, Illinois.
6. Toro ( TTC )
TTC manufactures and markets turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow, and ice management products, agricultural micro-irrigation systems, and residential yard and snow thrower products worldwide. It operates in two segments, Professional and Residential. TTC was founded in 1914 and is headquartered in Bloomington, Minnesota.
7. Tractor Supply ( TSCO )
Founded in 1938 and headquartered in Brentwood, Tennessee, TSCO operates rural lifestyle retail stores in the United States. The company provides equine, livestock, pet, and small animal products necessary for their health, care, growth, and containment. TSCO also provides hardware, truck, towing, tools, and seasonal products, as well as clothing and footwear.
8. Thermo Fisher Scientific ( TMO )
TMO provides life sciences solutions, analytical instruments, specialty diagnostics, and laboratory products and biopharma services in the United States and internationally. The company offers products and services through a direct sales force, customer-service professionals, electronic commerce, third-party distributors, and catalogs. TMO was founded in 1956 and is headquartered in Waltham, Massachusetts.
9. Elevance Health ( ELV )
ELV operates as a health benefits company, serving people through a portfolio of medical, digital, pharmacy, behavioral, clinical, and care solutions. The company was formerly known as Anthem, Inc. and changed its name to Elevance Health, Inc. in June 2022. ELV was founded in 1944 and is based in Indianapolis, Indiana.
10. United Parcel Service ( UPS )
UPS is a global leader in logistics, offering a broad range of solutions, including the transportation of packages and freight, the facilitation of international trade, and the deployment of advanced technology to more efficiently manage the world of business. Headquartered in Atlanta, UPS serves more than 220 countries and territories worldwide.
Please note that the top ten DG stocks are candidates for further analysis, not recommendations.
Key Metrics and Fair Value Estimates
Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates:
-
Yrs : years of consecutive dividend increases
-
Qual : Quality score out of 30
-
Fwd Yield : forward dividend yield for a recent share Price
-
5-Avg Yield : 5-year average dividend yield
-
5-DGR : 5-year compound annual growth rate of the dividend
-
5-EGR : 5-year compound annual growth rate of EPS
-
5-RGR : 5-year compound annual growth rate of revenue
-
5-YOC : the projected yield on cost after five years of investment
-
ACN : Adjusted Chowder Number
-
5-TTR : 5-year compound trailing total returns
-
VL PS : Value Li ne Price Stability
-
VL FS : Value Line Financial Strength ratings
-
MS EM : Morningstar Economic Moat
-
SP CR : S&P Global Credit Ratings
-
SS DS : Simply Safe Dividends Dividend Safety Scores
-
PI DG : Portfolio Insight Dividend Quality Grades
-
Buy Below : my risk-adjusted buy-below price
-
–Disc +Prem : discount or premium of the recent share Price to my Buy Below price
-
Price : recent share price
Color-coding
|
Created by the author from a personal spreadsheet
Here are the Sector and Super Sector designations of each candidate:
Rank | Company (Ticker) | Sector | Supersector |
1 | Visa ((V)) | Financials | Cyclical |
2 | UnitedHealth ((UNH)) | Health Care | Defensive |
3 | Intercontinental Exchange ((ICE)) | Financials | Cyclical |
4 | Home Depot ((HD)) | Consumer Discretionary | Cyclical |
5 | Abbott Laboratories ((ABT)) | Health Care | Defensive |
6 | Toro ((TTC)) | Industrials | Sensitive |
7 | Tractor Supply ((TSCO)) | Consumer Discretionary | Cyclical |
8 | Thermo Fisher Scientific ((TMO)) | Health Care | Defensive |
9 | Elevance Health ((ELV)) | Health Care | Defensive |
10 | United Parcel Service ((UPS)) | Industrials | Sensitive |
Commentary
Here's a comparative analysis of an equal-weighted portfolio of this month's top ten DG stocks, courtesy of Finbox.com:
finbox.com
From a price-performance perspective, the portfolio would have outperformed the S&P 500 (as represented by the SPDR S&P 500 Trust ETF ( SPY )) over the last five years, returning 83% versus SPY's 60%.
According to Finbox.com, six of the stocks have fair value upsides, with ICE , TMO , and V being the exceptions.
TSCO (28.3%), UNH (17.3), and V (17.2%) have the highest 5-year dividend growth rates and are strong candidates for growth-oriented investors.
TSCO (24.3%), TMO (20.6%), and UNH (16.2%) have the highest 5-year TTRs.
All but one stock ( ICE ) outperformed SPY over the 5-year time frame:
Portfolio Insight
UPS (3.09%) and HD (2.35%) offer the highest forward yields and are the most appropriate candidates for income investors.
As for valuations, ELV (-2%) and TSCO (-19%) are discounted most relative to my Buy Below prices, making them strong candidates for value investors.
Only one stock ( TSCO ) passes all five of my stock selection criteria for adding new positions to my DivGro portfolio:
- Stock Quality : Quality scores ? 21 ( Exceptional , Excellent , or Fine ratings)
- Stock Valuation : Price ? Buy Below price (trades below my risk-adjusted Buy Below price)
- Growth Outlook : Qualifying ACNs (likely to deliver annualized returns of 8%)
- Income Outlook : 5-year YoC ? 4.00% (likely to have high YoCs after 5 years of ownership)
- Dividend Quality : A+ or A Dividend Quality Grades
TSCO is a Dividend Contender with a dividend increase streak of 14 consecutive years. The stock yields 1.90% at $217 and has a spectacular 5-year DGR of 28.3%.
Portfolio Insight
With earnings and free cash flow payout ratios of only 39% and 49%, respectively, TSCO has plenty of room to continue paying and raising its dividend. With a Dividend Safety Score of 68, TSCO's dividend is deemed Safe by Simply Safe Dividends .
I don't own TSCO, but I'm considering opening a position.
Concluding Remarks
In this article, I ranked 11 high-quality, discounted Dividend Radar stocks with high growth rates and high 5-year TTRs and presented the 10 top-ranked stocks for further research and possible investment.
I own six of the stocks in this month's top 10. Of the stocks I don't own, only TSCO passes all of my selection criteria for adding new positions to my DivGro portfolio.
TSCO (28.3%), UNH (17.3), and V (17.2%) have the highest 5-year dividend growth rates and are strong candidates for growth-oriented investors.
TSCO (24.3%), TMO (20.6%), and UNH (16.2%) have the highest 5-year TTRs.
Based on your investment style, you may want to focus on the following stocks first:
- For income investors: UPS and HD
- For value investors: ELV and TSCO
- For growth-oriented investors: TSCO, UNH, and, V
As always, I encourage readers to do their due diligence before buying any stocks I cover.
Thanks for reading, and take care, everybody!
For further details see:
10 Dividend Growth Stocks For July 2023