3 Dividend Kings With Favorable Valuations

These dividend growth stocks have increased their dividend payouts every year for at least 50 years, and they are fairly valued now!
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The Dividend Kings are companies that have increased their annual dividend payouts for at least 50 consecutive years. This is a remarkable achievement over a time frame that included economic recessions, market crashes, technological revolutions, and shifting consumer tastes.

Dividend Radar is my watch list of dividend growth stocks. Updated and published weekly, Dividend Radar is an automatically generated spreadsheet listing stocks with five years or more dividend streaks. The latest edition (September 3, 2021) contains 752 dividend growth stocks and only 34 are Dividend Kings.

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As a dividend growth investor, I look to invest in high-quality and safe dividend growth stocks trading at reasonable valuations. This article presents five stock selection criteria I usually consider before buying dividend growth stocks for my DivGro portfolio and three Dividend Kings that meet those criteria.

Stock Selection Criteria

In the September edition of my monthly series 7 Dividend Growth Stocks, I shared five stock selection criteria I often use to pick dividend growth stocks for further research and possible investments. Here is a summary of those criteria as they relate to the Dividend Kings:

Stock Quality

I use DVK Quality Snapshots to determine quality scores (out of 25) for dividend growth stocks. I rate stocks based on their quality scores: Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9) stocks. Stocks with quality scores of 15-25 are Investment Grade stocks.

Chart by the author (data sources: see DVK Quality Snapshots)

Chart by the author (data sources: see DVK Quality Snapshots)

For this article, I considered only Dividend Kings rated Exceptional, Excellent, or Fine (colored green above).

Dividend Safety

While Dividend Safety Scores is one of the quality indicators of DVK Quality Snapshots, I highlight this metric separately. For this article, I selected Dividend Kings with Very Safe dividends (scores: 81-100) and Safe dividends (scores: 61-80). 

Chart by the author (data source: Simply Safe Dividends)

Chart by the author (data source: Simply Safe Dividends)

Two Dividend Kings (yellow) have dividend safety scores of 60 or below, so they did not qualify for coverage in this article.

Growth Outlook

The Chowder Number [CDN] sums a stock's forward yield and its 5-year dividend growth rate. It is a growth-oriented metric measuring the likelihood that a DG stock will deliver annualized returns of 8% or more. I color-code the CDN green for candidates likely to deliver annualized returns of 8% and yellow for those less likely to do so. Candidates unlikely to deliver annualized returns of 8% are colored red.

Chart by the author (data source: Portfolio Insight)

Chart by the author (data source: Portfolio Insight)

For this article, I considered only likely (green) and less likely (yellow) candidates.

Income Outlook

The 5-year Yield on Cost [YoC] is an income-oriented metric indicating what your YoC would be after buying a stock and holding it for five years, assuming the current 5-year dividend growth rate is maintained. I color-code the 5-year YoC column as follows: red < 2.50% ≤ yellow < 4.00% ≤ green.

Chart by the author (data source: Portfolio Insight)

Chart by the author (data source: Portfolio Insight)

I only considered Dividend Kings with 5-year YoC’s of at least 4.00% (green in the chart above), which have the best prospects for producing high dividend income in coming years. This is the most restrictive criterion used.

Stock Valuation

I routinely estimate the fair value of dividend growth stocks to identify candidates trading at favorable valuations. By a favorable valuation, I mean a risk-adjusted Buy Below price that allows a premium of up to 10% for Exceptional stocks and a premium of up to 5% for Excellent stocks but requires fair value or below for stocks rated Fine.

Chart by the author based on risk-adjusted Buy Below prices

Chart by the author based on risk-adjusted Buy Below prices

For this article, I considered only Dividend Kings trading below my risk-adjusted Buy Below prices (those colored green in the above chart).

To estimate fair value, I use a survey approach, collecting fair value estimates and price targets from several online sources, such as Morningstar and Finbox. I also estimate fair value using each stock’s five-year average dividend yield. With several 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 fair value estimate.

Dividend Kings Meeting All The Criteria

Only three Dividend Kings meet all the criteria stated above:

Screen Shot 2021-09-12 at 10.05.36 PM

The table above provides key metrics of interest to dividend growth investors, including the dividend increase streak (Years), the Forward Yield for a recent share Price, the 5-year compound annual dividend growth rate (5-Yr DGR), and the 5-year trailing total returns (5-Yr TTR). I also provide my fair value estimate (Fair Value) and the discount or premium (–Disc/+Prem) of the stock price relative to my fair value estimate.

Additionally, I provide metrics related to the selection criteria used in this article, including the five quality indicators that make up the DVK Quality Snapshots quality score (Qual), the 5-year YoC (5-YoC), the Chowder Number (CDN), the Dividend Safety Score (SSD Divi. Safety), and the risk-adjusted Buy Below price. Stock prices less than the Buy Below price are shaded green.

Lets look at these Dividend Kings in turn:

Illinois Tool Works Inc (ITW)

Founded in 1912 and headquartered in Glenview, Illinois, ITW is a diversified, global company that manufactures and sells industrial products and equipment worldwide. ITW operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products.

Screen Shot 2021-09-13 at 7.42.35 AM
ITW non-GAAP EPS and dividends paid (TTM), with stock price overlay

ITW non-GAAP EPS and dividends paid (TTM), with stock price overlay

3M Company (MMM)

MMM is a diversified technology company with worldwide operations. The company has leading positions in consumer and office; display and graphics; electronics and telecommunications; health care; industrial; safety, security and protection services; transportation; and other businesses. MMM was founded in 1902 and is headquartered in St. Paul, Minnesota.

Screen Shot 2021-09-13 at 7.44.52 AM
MMM non-GAAP EPS and dividends paid (TTM), with stock price overlay

MMM non-GAAP EPS and dividends paid (TTM), with stock price overlay

Hormel Foods Corporation (HRL)

HRL is a multinational manufacturer and marketer of consumer-branded food and meat products. The company sells its products through sales personnel, as well as through independent brokers and distributors. Customers include retailers, hospitals, nursing homes, and marketers of nutritional products. HRL was founded in 1891 and is based in Austin, Minnesota.

Screen Shot 2021-09-13 at 7.46.46 AM
HRL non-GAAP EPS and dividends paid (TTM), with stock price overlay

HRL non-GAAP EPS and dividends paid (TTM), with stock price overlay

Concluding Remarks

Screen Shot 2021-09-13 at 7.48.33 AM

This article presented three high-quality Dividend Kings that are fairly valued now. ITW and MMM are rated Excellent, and HRL is rated Fine.

The stocks have stellar dividend track records with more than 50 years of increasing annual dividend payments.

They have great income and growth prospects and safe dividends. MMM offers the highest forward yield at 3.16%, whereas ITW has the highest 5-year dividend growth rate of 15.7%. ITW likely will deliver annualized returns of at least 8%, whereas MMM and HRL are less likely to do so, based on the Chowder Rule. However, all three Dividend Kings should yield at least 4% on cost after five years of investment, assuming their current dividend growth rates are maintained.

MMM and HRL are discounted, while ITW is trading at a small premium to my fair value estimates. On a risk-adjusted basis, however, these Dividend Kings are trading below my Buy Below prices, so I think they are suitable for further analysis and possible investment.

As always, I advise readers to do their due diligence before investing in any stocks I highlight.

Thanks for reading and take care, everybody!

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