2023-11-13 07:05:00 ET
Summary
- Even with the market soaring for eight straight days, incredible bargains are available in the world's safest companies.
- That includes fast-growing dividend aristocrats and kings with wide moats and critical services for modern life.
- Here are 3 wonderful opportunities for fast-growing aristocrats right now. Each one is a Buffett-style "wonderful company at a wonderful price".
- Right now they are priced for a recession in 2024, meaning minimal short-term downside risk, but massive upside potential.
- Over the next decade, while the S&P is expected to deliver 160% returns, these aristocrats are expected to deliver 370% to 850% returns.
This article was co-produced with Kody Kester of Kody's Dividends .
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So long as investors keep their emotions in check, an investment approach that sees stocks for the underlying businesses that they are is almost guaranteed to succeed.
The blue-chip trio discussed below sports yields varying from 2.3% to 3.2% and pays safe dividends growing as far back as the Kennedy administration.
These three stocks are undervalued by 11% to as much as 28% relative to fair value, offering attractive entry points for the long haul.
They can generate 11% to 25% annual total returns over the next two years and up to 800% for the next decade, nearly 6X the S&P 500 (SP500).
As part of a diversified portfolio, these three Dividend Aristocrats can help you sleep well at night and work toward the secure retirement we at Dividend Kings believe everyone deserves.
Long-term investing favors those who insist upon facts over folly. As humans, it's safe to say nobody's investing strategy is purely 100% facts and 0% emotions. But the road to success is paved by getting as close to such a composition of facts and emotions as possible.
Owning top-notch dividend stocks is the best way to overcome human emotions. Just as it helped me, this can help you to get past seeing stock tickers as lottery tickets and to view them for what they are: Real, live businesses that the world depends on to function each day.
Fundamentals are estimated to account for 97% of total returns over a 10+ year time horizon. Thus, ownership in high-quality companies for the long run is a sure bet to grow richer over time.
If you own such businesses, it is realistic to expect sales and profits to grow steadily over time. That is precisely what allows dividends to grow. On that note, here are three Dividend Aristocrats who have what it takes to deliver spectacular returns to shareholders in the next 10 years.
Lowe's Companies, Inc. (LOW): A Dividend King Leaning On The American Dream
A recent LendingTree consumer survey found that 94% of consumers believe owning a home remains a key component of the American dream. Unfortunately, about half (51%) of respondents who don't own a home are worried that they never will. These concerns are understandable in an environment with much higher housing prices and interest rates than pre-COVID.
Yet, I believe this is what makes Lowe's attractive right now. For context, Lowe's plays the undisputable role of Robin to The Home Depot's (HD) Batman. Analysts expect the former to generate $87.8 billion in revenue for its fiscal year ending 2024, about 9% of the roughly $1 trillion U.S. home improvement market. That's relative to the $153.1 billion that analysts in current year revenue from Home Depot.
Slightly diminished consumer disposable income is expected to result in a roughly 2% decline in adjusted diluted EPS this fiscal year for Lowe's. However, this downturn should only be temporary. As interest rates eventually come back down, tens of millions of millennials and Gen Zers enter the housing market, and Lowe's expands its pro revenue mix, growth will return. This is why FactSet Research believes the home improvement retailer can deliver 19.4% annual earnings growth moving forward.
Lowe's 2.3% dividend yield is also attractive versus the S&P 500's 1.6% yield. The company's adjusted diluted EPS payout ratio is set to clock in at around 32% for this fiscal year, which is a sustainable payout ratio. That should allow the company to build on its 62-year dividend growth streak with healthy payout raises in the future.
Lowe's is also financially solid, boasting a BBB+ credit rating from S&P on a stable outlook. This implies the company's risk of going out of business in the next 30 years is just 5%.
Concerns over a looming recession have brought Lowe's shares down to a bargain-bin valuation. The stock's $195 share price (this share price and all to follow are as of November 7, 2023) is about 28% below Dividend Kings' historical fair value of $271 a share.
If Lowe's grows as analysts expect and reverts to fair value, here are what total returns could look like over the next ten years:
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2.3% yield + 19.4% annual earnings growth consensus + 3.3% annual valuation multiple expansion = 25% annual total return potential or a cumulative total return of 831% versus the 10% annual total return potential of the S&P 500 (SPY) or a cumulative total return of 160%
FAST Graphs, FactSet
Automatic Data Processing, Inc. (ADP): The Champion Of Human Capital Management
ADP investor presentation
Anybody familiar with business operations knows that plenty of unnecessary tasks must be done to keep a business running smoothly. Chief among these obligations is the execution of human resource functions, the computation of taxes owed, and the payroll delivery.
Luckily, companies such as Automatic Data Processing or ADP specialize in these matters. The company has over a million clients for its software and services and delivers payroll to over 40 million people worldwide. As big as this may seem, there are at least tens of millions of businesses worldwide. ADP has room for future growth, owning about 12% of the $150 billion industry pie, growing at a mid-single-digit rate annually.
Thanks to its trusted reputation and leadership in a fragmented industry, FactSet Research thinks the company can grow 13.3% annual earnings in the years ahead. Alongside a fortress-like AA- credit rating from S&P on a stable outlook, this could bode well for future dividend growth.
That's especially the case when considering that ADP's adjusted diluted EPS payout ratio in its prior fiscal year was within its targeted range of 55% to 60%. This should allow the company to extend its 48-year dividend growth streak with a robust raise later this month.
ADP isn't just a fundamentally sound business, either: a selloff in recent weeks has made the stock enticing again. ADP's $222 share price trades 11% under Dividend Kings' estimated fair value of $249.
Shareholders could be in for strong returns over the next ten years if the company meets growth expectations and returns to fair value:
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2.3% yield + 13.3% annual earnings growth consensus + a 1.2% annual valuation multiple boost = 16.8% annual total return potential or a 373% cumulative total return
FAST Graphs, FactSet
NextEra Energy, Inc. ( NEE ): Leading The Charge Toward Renewables
Wolfe Research Conference Presentation
Serving more than 12 million people across Florida, NextEra Energy is America's largest electric utility by retail megawatt hours and customer count. Not to mention that the company has been the most prominent leader in the transition toward renewables as a growing mix of energy.
NextEra currently has 250 gigawatts of renewables and storage projects in development, including projects under consideration and in the early stages of development. To understand its potential, consider that the company operated 68 gigawatts of assets as of June 30 (including NextEra Energy Partners assets).
As the U.S. develops economically and steadily grows in population, there will be a need for much more reliable and affordable energy. As evidenced by its ambitious development plans and an average 1,000-kilowatt-hours residential bill of $136, well below the national average sample of $192, NextEra can continue to lead this transition.
That is precisely why FactSet Research anticipates that the utility will grow earnings by 6.8% annually. That's in line with the 6% to 8% annual growth target set forth by management.
Judging by its A- credit rating from S&P on a stable outlook, NextEra should also have the financial might to execute its growth target. Coupled with a low- 60% payout ratio, the company should also be able to lengthen its 27-year dividend growth streak.
NextEra's valuation is what seals the deal to make it a buy . Its $59 share price is 27% less than our $81 fair value estimate. Here are what total returns could look like in 2033:
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3.2% yield + 6.8% annual earnings growth consensus + 3.2% annual valuation multiple upside = 13.2% annual total returns or a 246% cumulative total return.
FAST Graphs, FactSet
Summary: Three Smart Picks To Live The Retirement Of Your Dreams
Dividend Kings Zen Research Terminal
As SWANs/ultra SWANs, Lowe's, ADP, and NextEra are arguably three of the best businesses in the world that money can buy. Each company possesses promising growth potential, investment-grade credit ratings, and a sterling dividend growth track record.
Yet, the market is currently down on all three businesses, each valued at double-digit discounts to fair value. This is how they could collectively roar back and produce nearly 40% total returns in the next 12 months if strictly fundamentals came back into focus over market sentiment. Over the longer term, the trio could deliver the following returns in the 10 years ahead:
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2.6% yield + 13.2% annual earnings growth consensus + 2.5% annual valuation multiple boosts = 18.3% annual total return potential or a 437% cumulative total return versus the 10% annual total return potential or 160% cumulative total return of the S&P 500.
For investors who can tolerate the volatility of all stocks versus other asset classes, this combination of world-class fundamentals and cheap valuations are the raw materials of which rich retirement dreams are made.
For further details see:
3 Dividend Aristocrat Bargains For A Rich Retirement