2023-07-20 16:00:00 ET
Summary
- In today’s article, I will introduce you to 10 dividend growth companies that I believe are attractive to invest in right now.
- The 10 selected picks have shown an Average Dividend Growth Rate [CAGR] of 22.27% over the past 5 years.
- The Average P/E [FWD] Ratio of the selected picks stands at 21.52, which is attractive in my opinion due to the companies’ growth perspectives.
Investment Thesis
As I have already mentioned in previous articles for Seeking Alpha, the main objective of my investment articles is to help you build an investment portfolio with a reduced risk level that provides you with a relatively high Dividend Yield, while at the same time offers Dividend Growth, and therefore, helps you to enhance your dividend income at an attractive growth rate year over year.
Furthermore, my goal is to select companies for you which I consider to be attractive in terms of risk and reward, meaning that they come attached to a relatively low risk level (for example, due to their wide economic moat and their financial health) and offer an attractive expected compound annual rate of return.
This investment approach helps you to increase your dividend income annually while prioritizing the target of achieving an attractive Total Return from your investment portfolio.
Today’s article focuses on companies that could provide your investment portfolio with Dividend Growth. I have selected 10 companies that I currently consider to be particularly attractive for different reasons.
First, I would like to explain the selection process for my top dividend growth stocks of the month of July. Since I have already explained this selection process in a previous article , you can skip the following description written in italics, if you are already familiar with the selection process.
First step of the Selection Process: Analysis of the Financial Ratios
In a first step, companies must meet the following requirements to be part of a pre-selection among which I will select the top dividend growth stocks of the month:
- Market Capitalization > $10B [changed from $15B]
- Payout Ratio < 60%
- Average Dividend Growth Rate over the past 5 Years > 5%
- Dividend Yield [FWD] > 0%
- P/E [FWD] Ratio < 50
- EBIT Margin [TTM] > 5% or Net Income Margin [TTM] > 5%
- Return on Equity > 5% [changed from 8%]
I consider these metrics mentioned above important in order to help you to make well founded investment decisions and to increase the probability of making good investment decisions.
A relatively low Payout Ratio ensures that the company still has sufficient room for future dividend enhancements. This is particularly important for dividend growth investors that aim to invest with a long investment horizon. At the same time, a relatively low Payout Ratio contributes to the fact that the probability of a future dividend cut is lower. A dividend cut could make the stock price decline significantly in a short period of time.
A relatively high Dividend Growth Rate of more than 5% over the past 5 years ensures to increase the probability that the company will be able to raise its Dividend to a significant amount in the following years.
A P/E [FWD] Ratio of less than 50 contributes to the fact that the growth expectations that are priced into the stock price of the company you aim to invest in are not extraordinarily high. This helps you that you run less risk of the share price decreasing significantly in s short-period of time in case that growth expectations for the company are not met. This can contribute to help you to protect you from losing a significant amount of money in a short period of time.
An EBIT Margin or Net Income Margin of more than 5% and a Return of Equity of more than 5% [changed from 8%] help to filter out companies that are profitable.
Second step of the selection process: Analysis of the Competitive Advantages
In a second step, the companies’ competitive advantages (for example: brand image, innovation, technology, economies of scale, etc.) are analyzed in order to make an even narrower selection. I consider it to be particularly important for companies to have strong competitive advantages in order to stand against the competition in the long term. Companies without strong competitive advantages have a higher probability to go bankrupt one day, representing a strong risk for investors to lose their invested money.
Third step of the selection process: The Valuation of the companies
In the third step of the selection process, I will dive deeper into the Valuation of the companies.
In order to conduct the Valuation process of the companies, I use different methods and criteria, for example, the companies’ current Valuation as according to my DCF Model, the expected compound annual rate of return as according to my DCF Model and/or a deeper analysis of the companies’ P/E [FWD] Ratio. These metrics should serve as an additional filter to select only companies that currently have an attractive Valuation, helping you to identify companies that are at least fairly valued.
The Fourth and final step of the selection process: Diversification over Industries and Countries
In a fourth and last step of the selection process, I have established the following rules for my top picks of the months selection: in order to help you to diversify your investment portfolio, a maximum of 2 companies should be from the same industry. In addition to that, there should be at least one pick that is from a company that is based outside of the United States, serving as an additional geographical diversification.
New Companies when compared to the list of the previous month
- Bank of America (NYSE: BAC )
- Visa (NYSE: V )
- Broadcom (NASDAQ: AVGO )
- Steel Dynamics (NASDAQ: STLD )
- Tencent (TCEHY)
My Top 10 Dividend Growth Companies to invest in for July 2023
- Apple (NASDAQ: AAPL )
- Bank of America
- BlackRock (NYSE: BLK )
- Broadcom
- Mastercard (NYSE: MA )
- Microsoft (NASDAQ: MSFT )
- Steel Dynamics
- Tencent
- The Goldman Sachs Group (NYSE: GS )
- Visa
Overview of the selected Dividend Growth Stocks to invest in July 2023
Company Name | Sector | Industry | Country | Dividend Yield [TTM] | Dividend Yield [FWD] | Dividend Growth 5Y | P/E [FWD] Ratio | Return on Equity |
Apple | Information Technology | Technology Hardware, Storage and Peripherals | United States | 0.49% | 0.51% | 7.26% | 31.8 | 145.61% |
Bank of America | Financials | Diversified Banks | United States | 3.00% | 3.00% | 12.89% | 8.74 | 10.47% |
BlackRock | Financials | Asset Management and Custody Banks | United States | 2.72% | 2.75% | 12.93% | 20.78 | 12.32% |
Broadcom | Information Technology | Semiconductors | United States | 2.01% | 2.07% | 23.34% | 21.14 | 63.67% |
Mastercard | Financials | Transaction & Payment Processing Services | United States | 0.55% | 0.57% | 17.80% | 32.88 | 154.10% |
Microsoft | Information Technology | Systems Software | United States | 0.79% | 0.81% | 10.02% | 34.97 | 38.60% |
Steel Dynamics | Materials | Steel | United States | 1.43% | 1.59% | 17.44% | 6.67 | 44.70% |
Tencent | Communication Services | Interactive Media and Services | China | 4.35% | 0.68% | 77.05% | 18.28 | 22.69% |
The Goldman Sachs Group | Financials | Investment Banking and Brokerage | United States | 3.06% | 3.06% | 26.81% | 11.79 | 9.01% |
Visa | Financials | Transaction & Payment Processing Services | United States | 0.71% | 0.74% | 17.20% | 28.17 | 42.35% |
Average | 1.58% | 22.27% | 21.52 | 54.35% |
Source: The Author, data from Seeking Alpha
Ap ple
I continue to believe that Apple is an excellent pick for investors that invest over the long term and plan to benefit from the company’s share buyback program and its continuously increasing Dividend.
In a recent article on Seeking Alpha , I documented that Apple is the largest position of my personal investment portfolio. I definitely see the company as an ideal buy-and-hold investment and I personally plan to hold my Apple stocks over the long term.
However, I admit that the Apple stock is currently not cheap: the company’s P/E [FWD] Ratio of 31.87 lies 21.65% over the Sector Median. But I do believe that the Apple stock should be rated with a premium when compared to its peer group. This is due to the company’s strong competitive advantages, to which I count its own ecosystem, high customer loyalty, high switching costs as well as its strong brand image.
Apple has shown a Dividend Growth Rate [CAGR] of 7.26% over the past 5 years and of 9.00% over the past 10 years, indicating that it's an attractive pick in terms of Dividend Growth. Below you can find the Seeking Alpha Dividend Growth Grade, which once again underlines Apple’s strength when it comes to Dividend Growth.
Bank of America
Within the past 6-month period, Bank of America has shown a negative performance of -15.67%. I believe that the U.S. bank is attractive not only for dividend income investors, but also for dividend growth investors at its current price levels when investing over the long term.
The bank currently pays shareholders a Dividend Yield [FWD] of 3.02%. Its current Dividend Yield [FWD] stands 29.11% over its Average Dividend Yield [FWD] from the past 5 years, which can be interpreted as an indicator that the bank is undervalued at this moment in time.
This is also confirmed by taking a look at the bank’s current P/E [FWD] Ratio of 8.75, which lies not only 26.78% below its Average from over the past 5 years, but also 7.22% below the Sector Median. Both comparisons confirm my investment thesis that the U.S. bank is undervalued at this moment of writing.
I further believe that Bank of America is an excellent pick in terms of Dividend Growth, which is confirmed by the banks Dividend Growth Rate [CAGR] of 36.22% over the past 10 years (while the Dividend Growth Rate [CAGR] of the Sector Median lies at 8.31% over this time period).
In terms of Dividend Growth, Bank of America (Dividend Growth Rate [CAGR] of 6.92% over the past 3 years) has lately been ahead of competitors such as Wells Fargo (NYSE: WFC ) (Dividend Growth Rate [CAGR] of -16.92% over the past 3 years), Citigroup (NYSE: C ) (0%), and JPMorgan (NYSE: JPM ) (3.57%).
The graphic below shows a projection of Bank of America’s Dividend when assuming that it would raise its Dividend by 6% over the next 30 years (based on the company’s Dividend Growth Rate [CAGR] of 6.92% over the past 3 years). The graphic strengthens my belief that Bank of America is a great choice for both dividend income and dividend growth investors when investing over the long term.
BlackRock
BlackRock is another company which provides investors with an appealing mix of dividend income and dividend growth.
If I was to build an investment portfolio from zero today, I would give BlackRock a relatively high percentage of the overall portfolio due to this mix of dividend income and dividend growth that it provides investors with. This also makes me believe that the company is a great buy-and-hold investment from which you can enormously benefit when investing over the long term.
BlackRock has shown a Dividend Growth Rate [CAGR] of 12.00% over the past 10 years and a Dividend Growth Rate [CAGR] of 12.93% over the past 5 years. Both stand significantly over the Sector Median.
I further believe that BlackRock has strong competitive advantages that help the company to stand out against its competitors over the long term. Among these competitive advantages are its investment and risk management expertise, its strong brand image, its long-term relationships with its clients as well as its broad product portfolio.
Below you can find the Seeking Alpha Dividend Growth Grade for BlackRock, underlining my investment theory that the company is an excellent pick for dividend growth investors.
It’s also worth mentioning that the company is currently fairly valued. This is the case because its current P/E [FWD] Ratio of 20.75 stands just 8.01% above its Average from over the past 5 years.
Broadcom
Broadcom also provides investors with an attractive mix between dividend income and dividend growth, and therefore the company can contribute to raising your additional income in the form of dividends at an attractive level.
At the company’s current stock price of $888.58, it pays shareholders a Dividend Yield [FWD] of 2.07%. Furthermore, it is worth mentioning that Broadcom has shown impressive Dividend Growth Rates in recent years: the company’s 5 Year Dividend Growth Rate [CAGR] stands at 23.34% and its 10 Year Dividend Growth Rate [CAGR] stands at 37.71%. These figures further strengthen my belief that the company can offer investors an attractive mix between dividend income and dividend growth.
In terms of Valuation, it can be highlighted that Broadcom’s P/E [FWD] Ratio of 25.92 stands 22.46% below its Average from over the past 5 years and, in addition to that, it lies 1.04% below the Sector Median. These metrics confirm that the company is currently undervalued.
The Seeking Alpha Quant Ranking also suggests that Broadcom is an excellent choice for investors. The company is currently ranked 1 st out of 68 within the Semiconductors Industry, 7 th out of 584 within the Information Technology Sector, and 36 th out of 4678 within the Overall Ranking.
Source: Seeking Alpha
Mastercard
Mastercard is also among the largest positions of my personal investment portfolio, which I discussed in my latest article on Seeking Alpha. As I have shown, Mastercard currently accounts for 7.38% of my overall investment portfolio, being the third largest position.
One of the reasons for having selected Mastercard as one of the largest positions of my personal investment portfolio is its strength when it comes to Dividend Growth. Due to the company’s impressive Dividend Growth Rates it has shown in the past, I believe that it can significantly contribute to raising the Weighted Average Dividend Growth Rate [CAGR] of an investment portfolio.
Mastercard has shown a Dividend Growth Rate [CAGR] of 28.44% over the past 10 years, which lies 242.19% over the Sector Median, thus strengthening my investment thesis that the company is a great pick in terms of Dividend Growth.
Even though Mastercard’s current Valuation is not particularly attractive, it can be highlighted that the company is currently fairly valued: its P/E [FWD] Ratio of 33.97 stands 10.00% below its Average from the past 5 years, underlying my thesis that Mastercard is currently fairly valued.
When it comes to Growth, I believe Mastercard (Revenue Growth Rate [FWD] of 14.87%) is slightly superior when compared to Visa (Revenue Growth Rate [FWD] of 14.46%) and PayPal (NASDAQ: PYPL ) (8.31%).
Below you can find a projection of Mastercard’s Dividend and Yield on Cost when assuming that you would invest in the company at its current price level of $402.51 and that it would be able to raise its Dividend by 12% over the following 30 years (based on the company’s Dividend Growth Rate [CAGR] of 12.87% over the past 3 years).
Microsoft
Similar to Apple, Microsoft’s current Valuation is not particularly attractive at this moment in time. However, it should be highlighted that its current P/E [FWD] Ratio of 36.22 only stands slightly above its Average from the past 5 years (which is 29.54). Therefore, I believe that the company is currently fairly valued.
The reason for believing that Microsoft is fairly valued even though its current P/E [FWD] Ratio stands at a relatively high level and is above its Average from over the past 5 years is the Growth Rates that the company has shown over the past years: Microsoft has shown a Revenue Growth Rate [FWD] of 11.89% and an EBIT Growth Rate [FWD] of 12.41%. These numbers underline that the company is on track in terms of Growth and that its current Valuation is fair.
Microsoft is another of these companies that I consider to be excellent buy-and-hold investments from which investors can benefit enormously when investing over the long term.
The Seeking Alpha Dividend Grades further underline that the company is an excellent pick for dividend growth investors: Microsoft is rated with an A+ for Dividend Safety and Dividend Growth, and with an A for Dividend Consistency.
Steel Dynamics
Steel Dynamics operates as a steel producer through the following three segments :
- Steel Operations
- Metals Recycling Operations
- and Steel Fabrication Operations
The company was founded in 1993 and currently has a Market Capitalization of $17.98B.
Steel Dynamics has shown impressive results in terms of Dividend Growth, which is the reason why it has managed to make it into this list of high dividend growth companies. The company’s Dividend Growth Rate [CAGR] over the past 10 years stands at 13.80%, which is well above the Sector Median of 5.85%.
At its current price level, Steel Dynamics’ Dividend Yield [FWD] stands at 1.60% and its Payout Ratio lies at a low level of only 7.02%. This indicates that there is plenty of room for future dividend enhancements from which investors can benefit when investing over the long term.
Moreover, I believe that the company’s Valuation is currently attractive: Steel Dynamics’ P/E [FWD] Ratio of 6.92 lies 50.87% below the Sector Median, indicating that it’s currently undervalued.
Below you can find the Seeking Alpha Valuation Grade for Steel Dynamics, which further strengthens my belief that the company is undervalued at this moment in time.
Tencent
I believe that Tencent’s Valuation is currently particularly attractive for investors, which is why it has made it into this list of dividend growth companies to consider investing in: Tencent’s current P/E Non-GAAP [FWD] Ratio of 18.22 lies 40.88% below its Average from over the past 5 years, which can be interpreted as an indicator that the company is undervalued.
However, it should be noted that Tencent’s Growth Rates are currently not as high as they have been in the past: The company’s Revenue Growth Rate [FWD] lies at 3.53% (while it has been at 21.14% over the past 5 years).
Tencent’s Dividend Growth Rate [CAGR] over the past 10 years stands at 54.15%, strengthening my belief that the company should be able to offer investors dividend growth in the following years. It is also worth mentioning that its Payout Ratio lies at a relatively low level of 17.03%. Tencent has already shown 14 Consecutive Years of Dividend Payments and Dividend Growth, highlighting the company’s dividend track record.
Below you can find the Seeking Alpha Profitability Grade for Tencent, underlying its strength when it comes to Profitability.
The Goldman Sachs Group
The reasons for which the U.S. bank has made it into this list of dividend growth companies and for which it is also part of my personal investment portfolio are numerous.
First, I think The Goldman Sachs Group provides investors with an attractive mix of dividend income and dividend growth (its Dividend Yield [FWD] lies at 3.07% while its Dividend Growth Rate [CAGR] over the past 5 years stands at 26.81%).
In addition to that, I believe the bank has a wide economic moat, to which its strong competitive advantages contribute: among The Goldman Sachs Group’s competitive advantages are its strong brand image, its global network within the Financial Sector, its enormous investment banking and risk management expertise as well as its continuous focus on innovation.
Below you can find the Consensus Dividend Estimates for The Goldman Sachs Group: the Consensus Yield stands at 3.17% for 2023, 3.42% for 2024, and 3.59% for 2025.
Visa
Visa is also among the largest positions of my personal investment portfolio. The company currently has a proportion of 6.20% of my overall investment portfolio .
There are a number of reasons why I have made it one of the largest positions of my own investment portfolio: the company is an excellent pick in terms of Dividend Growth (it has shown a Dividend Growth Rate [CAGR] of 17.20% over the past 5 years), it has an enormous financial health (EBITDA Margin [TTM] of 69.90%), and I also believe that it has a wide economic moat. This helps to prevent other companies entering into its business segment (I believe that Visa’s large amount of credit and debit cards in combination with its broad network within the financials industry contribute to this economic moat).
Visa’s current Valuation (P/E [FWD] Ratio of 29.17) is lower than its Average from over the past 5 years (32.92), making me believe that the company is undervalued at its current price levels.
Below you can find a projection of Visa’s Dividend and Yield on Cost when assuming that you were to invest in the company at its current price level of $244.18. The graphic underlines that Visa is a top pick for dividend growth investors with a long investment-horizon.
Conclusion
The 10 selected dividend growth companies that I have presented in today’s article should be able to contribute to raising your dividend income at an attractive level year over year. This selection of companies has shown an Average Dividend Growth Rate [CAGR] of 22.27% over the past 5 years, raising my confidence that they can provide you with significant Dividend Growth when investing over the long term.
At the same time, the 10 companies have an Average P/E [FWD] Ratio of 21.52, indicating that their Valuation is attractive, particularly when taking into account their growth perspectives. Furthermore, I believe that each of the selected companies has strong competitive advantages and a robust financial health, and therefore, can help you to reduce the risk level of your portfolio.
I believe that companies like this can contribute to helping you implement my investment strategy that combines a mix of a relatively high Dividend Yield with Dividend Growth while prioritizing the Total Return of your investment portfolio.
Author’s note: I would appreciate hearing your opinion on this selection of dividend growth companies. Do you own any of these picks or plan to acquire them? What are currently your favorite dividend growth stocks to buy?
For further details see:
My Top 10 Dividend Growth Stocks To Invest In For July 2023