2023-08-29 09:48:00 ET
Summary
- The article ranks 5 dividend growth stocks based on their quality, focusing on factors such as balance sheet, management, growth, and stability.
- The Home Depot is ranked as a "MUST OWN" stock due to its leadership in the home improvement industry and strong dividend growth.
- AbbVie is ranked as "High-Quality" due to its transition period but still being a solid pharmaceutical company with consistent dividend growth.
In the past, we have done a few ranking articles that received a lot of positive comments from the audience. Those articles included:
As requested, here is another where today we will be ranking 5 dividend growth stocks from highest to lowest in terms of quality. So again, more focused on quality and less on current valuation, although we will look at that as well.
I consider a company to be a dividend growth stock if they have at least these two attributes:
- Increased their dividend for 10+ consecutive years
- Have a 5-year Dividend Growth Rate of 10% or MORE
When looking at quality, I assess the following factors:
- Balance Sheet
- Management
- Growth
- Stability through various economic cycles
- And more
So to begin, let me show you the 5 Dividend Growth stocks we will be ranking today:
- The Home Depot (HD)
- Starbucks (SBUX)
- United Parcel Service (UPS)
- Costco Wholesale (COST)
- AbbVie (ABBV)
We will rank these stocks into 1 of 4 categories
- MUST OWN ? This is pretty self-explanatory, as these are the highest quality stocks
- High-Quality ? Solid company and stock, great fit for most portfolios but not necessarily a MUST OWN
- Like, but not love ? These are companies that are solid, but could falter from time to time. You may find them in my portfolio here and there, but they tend to have more short term stays within the portfolio
- Prefer not to own ? These are companies that run into issues more than average, and ones I tend to not own in my portfolio
Ranking 5 Dividend Growth Stocks
Dividend Growth Stock #1 - The Home Depot
The Home Depot is the largest home improvement retailer, operating in a duopoly with the likes of Lowe’s Companies ( LOW ). HD has a market cap of $326 billion and over the past 12 months, the stock is up 5%.
One of the great things about HD is that they are improving their online sales, but at the same time, they are insulated from the threat of e-commerce to a degree. Maybe I am wrong, but I do not foresee Amazon ( AMZN ) selling 2x4s, sheet metal, or lemon trees all that often.
Sure you can buy appliances on Amazon, but most people want to touch, feel, and see appliances before buying and HD matches amazon’s price, making it more likely that consumers will purchase these products from their local Home Depot over Amazon.
In addition to being a solid company on its own, HD has also been a tremendous dividend growth stock over the years. HD pays an annual dividend of $8.36 per share, which equates to a dividend yield of 2.6%. That dividend is plenty safe with a low payout ratio of 51%.
Now let's look at dividend growth, which is key when you look at the process of Compounding Dividends. HD has a five year dividend growth rate of 15.8%.
As you get paid a dividend, you can reinvest those funds back into the business, either automatically or manually, which means you now have more shares than the year before and if a company is increasing their dividend EVERY year, like HD has done for 13 consecutive years, you now have a HIGHER amount of shares to go along with a HIGHER dividend per share.
You can see how that snowball will work faster and faster as the years go by.
Now let's take a look at valuation.
Analysts are looking for EPS of $16.21 next year, which equates to a forward P/E multiple of 20.1x. Over the past five years, shares of HD have traded at an average earnings multiple of 21.5x and over the past decade closer to 22x, so a slight discount here at current levels.
Now for ranking, when it comes to Home Depot, a company that is a leader in their space and efficiently managed with solid margins, I rank Home Depot as one of those MUST OWN stocks when looking for a quality dividend growth company.
Dividend Growth Stock #2 - AbbVie
AbbVie is a position that has been in my portfolio for one of the longest periods, buying my first shares when the stock was back in the $60 range. I have since sold some of those shares which have brought my average cost basis up, but the stock has made me a lot of money over the years.
AbbVie currently has a market cap of $260 billion and over the past 12 months, shares have climbed 6%.
AbbVie has been its own public company for about 10 years now, as they were spun off originally from Abbott Laboratories ( ABT ), but has now since surpassed Abbott in terms of market cap.
AbbVie has had the world’s best-selling drug in Humira for a number of years, but the drug’s patent protection came to an end at the start of 2023, when the drugs patent expired. As such, we have seen revenues drop off, but not as much as expected here in the US. In addition, ABBV has a number of up and coming drugs that will soon enough hold the torch and pull the weight that Humira once did, two of those drugs being Rinvoq and Skyrizi.
AbbVie pays an annual dividend of $5.92 per share which currently equates to a dividend of roughly 4%. The dividend is plenty safe with a payout ratio below 50%. The company has increased their dividend every year they have been public and they have a 5-year dividend growth rate of 12.3%.
In terms of valuation, analysts are looking for EPS of $11.04 next year, which equates to a forward P/E multiple of 13.3x. For comparable purposes, shares of ABBV have traded at an average multiple of 11.4x over the past five years and closer to 13x over the past decade.
Now for ranking, when it comes to AbbVie, I have a ton of love for them, but know there are a lot of great pharmaceutical companies to choose from, so with that being said, I would put them a notch under MUST OWN and rank them as High-Quality . They are going through a transition right now, but I am going to continue to own the shares for the long-term.
Dividend Growth Stock #3 - United Parcel Service
United Parcel Service, or UPS is one of the largest logistics companies in the US today and over the past five years, shares of UPS have climbed 36%, but over the past 12 months, shares are down nearly 20%. UPS currently has a market cap of $143 billion.
The stock has been trading sideways for much of the past 2 years, and the stock has been a bit of a roller coaster in 2023 as they went through a nasty labor battle with their union workers. The two sides recently came to an agreement, which should add a lot of expenses over the next few years, which will certainly impact the bottom line.
Businesses are not shipping more or less due to UPS’ union deal, as such, they will be forced to increase prices, and today, businesses have various choices in terms of which logistics company they will choose. Many analysts have come out and downgraded the stock as the increased labor costs will certainly weigh on the business.
In terms of the dividend, UPS pays an annual dividend of $6.48 per share which currently equates to a dividend of 3.9%. The dividend is plenty safe with a payout ratio at only 55%. UPS has increased their dividend at an average annual rate of 12.4% over the past 5 years, making them a dividend growth stock. How the increased Labor costs will impact the dividend growth will be interesting to watch moving forward.
Now, let's take a look at valuation where analysts are looking for EPS of $10.75 next year, which is down considerably following the agreement with the labor union, which as I mentioned would weigh heavily on the bottom line. These new estimates equate to a forward P/E multiple of 15.7x, and over the past 5 yrs, shares have traded at an average earnings multiple of 15.5x, which means shares appear fairly valued at current levels.
So where do we rank UPS in terms of quality? With e-commerce continuing to grow and become a larger portion of total retail sales, UPS you would think would grow along with it, but the higher labor costs which could lead to higher prices which could end up being a win for the likes of FedEx ( FDX ), DHL and other logistics companies. Also, competition from Amazon cannot go unnoticed either, as such, I rate UPS in the PREFER NOT TO OWN category.
Dividend Growth Stock #4 - Starbucks Corporation
Starbucks is another stock I have owned for some time, as I like both the product and the stock. Early on when I started investing, one of the first things I learned was to invest in what you know. Well given that I was frequently visiting SBUX, I got interested in their financials and that is where the love for the stock grew. Starbucks is the premiere coffee chain around the globe today with their top two primary markets being the US and China.
Starbucks currently has a market cap of $109 billion and over the past 12 months, shares of SBUX have climbed 9%.
Starbucks ran into some trouble when the pandemic hit, but otherwise the company has been fantastic. They have one of the most loyal customer bases around with more than 31 million rewards members in the US alone, active that is meaning they have purchased something in the past 90 days.
Starbucks has transformed into much more than just a regular coffee shop, as they now have:
- Food options
- Merchandise
- Creative drink options
- Reserve roasteries
- And more
Strong cash flow is what has led the company increasing their dividend for 12 consecutive years. The company pays an annual dividend of $2.12 per share which equates to a dividend yield of 2.2%. SBUX has a 5yr DGR of 11%, firmly making them a dividend growth stock.
Now for valuation, where analysts are calling for EPS of $4.08 next year, which implies 18% EPS growth after a year in which they are expected to generate 17% EPS growth. This has the stock trading 23.4x, which is below their five year average of 31x.
So where do we rank this fantastic company? I love them a lot, but do not consider them a MUST own. They can be volatile at times, as we saw with the pandemic and they rely a lot on new store openings, something they are doing every 9 hours over in China. So with that being said, I rate Starbucks in the High-Quality section in terms of dividend growth stocks.
Dividend Stock #5 - Costco Wholesale
Costco Wholesale is our 5th and final Dividend Growth stock that we are looking at today. So, we are moving from one company with a loyal customer base to another with an even larger and arguably more loyal customer base in terms of Costco.
Costco has nearly 125 million cardholders, which is incredible to think of. Costco has stores all over the globe, but 86% of all stores being in North America.
Costco has a market cap of $237 billion and over the past 5 years the stock price has grown by nearly 150%, but they are down 3% over the past 12 months.
I do not know about you, but I can spend well over an hour inside A Costco Warehouse. If I am going shopping at either Home Depot or Costco, do not expect it to be a quick trip. Costco does such a great job of moving things around, as annoying as it may be as a shopper, but they really force you to visit almost every aisle, which results in me buying things that were not initially on my list to begin with. All part of their strategy.
Costco’s growth has been strong and that has resulted in it being a high multiple stock, which we will look at in a second, but let's first look at the dividend
Costco is not known much for their dividend yield but they do have strong dividend growth. The stock yields a low dividend yield of 0.8% with a low payout ratio below 30%. Costco has increased their dividend for 18 consecutive years and they have a 5-year DGR of 13%.
The other unique thing about Costco is the fact that they have started regularly paying a “special dividend” which is always a nice surprise for investors.
In terms of valuation, analysts are calling for EPS of $15.50 per share next year which would be the slowest EPS growth since 2016. This has the stock trading at a forward earnings multiple of 34.4x, which is above their 10-year average of 32x.
In terms of ranking, COST is a MUST OWN as they over strong dividend growth, have a loyal customer base with a high 90% renewal rate and they offer investors strong share price appreciation potential as they continue to add new shares..
Investor Takeaway
When it comes to investing in dividend stocks, dividend growth stocks are my favorite type because they put the power of compounding into overdrive. These stocks tend to offer both share price growth as well as a growing dividend.
As you can see from the five dividend growth stocks we looked at today, the yields tend to be a lot lower, not always the case as we can see with shares of ABBV.
In the comments section below, let me know how you would rate these five dividend growth stocks in terms of quality.
Disclosure: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.
For further details see:
Ranking 5 Dividend Growth Stocks From Highest To Lowest Quality