Skip to main content

I've been working with Portfolio Insight to develop a Dividend Quality Grade for dividend stocks. The system evaluates all dividend-paying stocks and assesses the likelihood of a dividend increase in the next twelve months. It also identifies stocks at risk of freezing or cutting their dividends. In backtests, the system accurately predicted a failure to continue dividend increases in more than 98% of cases.

For this article, I used a pre-release version of Dividend Quality Grades to extract Dividend Champions and Dividend Contenders with A+ Dividend Quality Grades. These are Exceptional dividend growth [DG] stocks with solid fundamentals and dividend increase streaks of ten years or more.

Additionally, I screened for stocks trading below my fair value estimates. These stocks offer good value and are suitable for immediate investment.

Finally, I screened for stocks with forward dividend yields of at least 4%. As a DG investor within a few years of retirement, I’m interested in finding candidates with higher yields. Investing in higher-yielding stocks allows me to reinvest dividends and grow my portfolio of DG stocks faster.

Dividend Quality Grade

To determine a stock’s Dividend Quality Grade, Portfolio Insight uses broker-grade data and the same technology platform that delivers Dividend Radar to the investment community every week. The approach is data-driven and eliminates assumptions or subjective biases about underlying metrics.

The system analyzes twenty metrics over a 10-year timeframe and establishes a quality range for each metric using data from DG stocks with dividend increase streaks of at least ten years. The analysis is done per GICS sector, and each stock then receives a score per metric based on where it falls in the corresponding quality range.

Individual metric scores are combined into component scores for the following categories:

  • EPS Performance & Outlook
  • Dividend Performance and Outlook
  • Revenue Performance & Outlook
  • Financial Performance
  • Profitability Performance

The component scores are rolled into an overall score per ticker, then ranked based on where they fall by percentile. These rankings determine a stock's Dividend Quality Grade from A+ to F.

I used a pre-release version of Portfolio Insight to screen for Dividend Champions with A+ Dividend Quality Grades. Of the 130 Dividend Champions in the latest version of Dividend Radar (dated December 23, 2022), 48 stocks have A+ Dividend Quality Grades.

Discounted Valuation

I use a survey approach to estimate fair value by collecting fair value estimates and price targets from several online sources, including Portfolio Insight, Morningstar, and Finbox.

Additionally, I estimate fair value by dividing each stock’s annualized dividend by its historical 5-year average dividend yield. With as many as 11 available estimates per stock, 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. Averaging the mean (average) and median (middle value) helps to adjust for skewness in the surveyed estimates.

My survey approach to estimating fair value allows me to determine reasonable fair value estimates for hundreds of stocks quickly. Over time, I’ve gained confidence in this approach, which averages out sometimes widely different opinions about the fair value of a stock.

I now calculate and present risk-adjusted Buy Below prices in my articles. My Buy Below prices allow premium valuations for the highest-quality stocks but require discounted valuations for lower-quality stocks, based on the following matrix:

Screen Shot 2022-12-30 at 10.01.45 AM

Here, the Quality Scores are based on the scoring system of DVK Quality Snapshots, which employs five widely used quality indicators from independent sources and assigns 0-5 points to each quality indicator for a maximum of 25 points.

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. In ten years, the price I paid for a stock will have almost no impact on my stock ownership, but the quality of the stock will likely determine if I even own that stock for ten years!

I screened for stocks trading at a discount to my fair value estimates and found 17 Dividend Champions with A+ Dividend Quality Grades that passed this screen.

Forward Dividend Yield

Only 19 of the 130 Dividend Champions have forward dividend yields of 4% or higher. But when I add the other two screens (A+ Dividend Quality Grades and Discounted Valuation), only three stocks remain!

So without further ado, here are the 3 High-Yielding, Discounted Dividend Champions with A+ Dividend Quality Grades:

Digital Realty (DLR)

DLR is a real estate investment trust that owns, acquires, develops, and operates data centers. The company provides data center and co-location solutions to domestic and international tenants, including companies providing financial and information technology services. The company was founded in 2004 and is headquartered in San Francisco.

DLR is a Real Estate Sector stock with a dividend increase streak of 18 years. This makes DLR a member of the Dividend Contenders, which are companies that have increased their annual dividend payouts for 10-24 consecutive years.

The stock yields 4.91% at $101.47 per share, a yield which is about 42% higher than its trailing 5-year average yield of 3.47%:

Digital Realty (DLR)

Digital Realty (DLR)

Over the past ten years, DLR has underperformed the SPDR S&P 500 ETF (SPY), an ETF designed to track the companies in the S&P 500:

Digital Realty (DLR)

Digital Realty (DLR)

DLR returned 121% versus the SPY's 224%, a margin of only 0.54-to-1.

If we extend the time frame of comparison to 29 October 2004 when, DLR started trading, the stock easily outperformed SPY, with total returns of 1,647% versus SPY's 375%, a margin of 4.39-to-1.

DLR’s poor recent performance is due to a significant drop in the share price from it 52-week high of $178 in December 2021 to about $101 today, or about 43%!

The question is, what does a dividend growth investor get if they invest in DLR?

Here is a chart showing DLR’s dividend growth history through the end of 2021:

Digital Realty (DLR) Dividend Growth

Digital Realty (DLR) Dividend Growth

DLR is growing its dividend steadily, but note that recent increases have been smaller than the 5-year and 10-year dividend growth rates [DGRs].

DLR's revenue is consistently growing, with an increase of 5.51% expected for FY 2022 and another increase of 8.79$ expected for FY 2023:

Digital Realty (DLR)

Digital Realty (DLR)

I love to see steady revenue increases at rates exceeding the DGR, as with DLR. This gives me confidence that the company will continue to pay and periodically increase its dividend.

DLR’s adjusted funds from operations (AFFO) of 79% is “low for REITs,” according to Simply Safe Dividends:

This means DLR has plenty of room to continue paying and increasing its dividend.

Portfolio Insight’s fair value [FV] is $128.72, with a 12-month target price of $122.09 (23% upside):

Digital Realty (DLR)

Digital Realty (DLR)

The P/E chart indicates that DLR is trading within its fair value range, but the Dividend Yield Fair Value chart indicates that DLR is trading well below the Undervalue Price.

My FV estimate of DLR is $125, so I think the stock is trading at a discount of about 19%. My Buy Below price is 10% below the FV estimate for stocks with a DVK Quality Snapshots quality score of 17 rated Decent. Therefore, my Buy Below price of DLR is $113.

For reference, CFRA’s FV is $100, Finbox.com’s FV is $105, Morningstar’s FV is $133, and Simply Wall St’s FV is $158. That’s quite a range of valuations!

According to Portfolio Insight, DLR scored in the 95th percentile of dividend-paying stocks and earned an A+ Dividend Quality Grade. This indicates DLR is extremely likely to continue increasing its dividend payout annually.

Disclosure: Long DLR

Realty Income (O)

Known as The Monthly Dividend Company®, O is an equity REIT that invests in commercial real estate markets in the United States and internationally. The company earns income from more than 6,500 properties under long-term lease agreements with commercial tenants. O was founded in 1969 and is headquartered in San Diego, California.

O is a Real Estate Sector stock with a dividend increase streak of 29 years. This makes DLK a member of the Dividend Champions, which are companies that have increased their annual dividend payouts for 25+ consecutive years.

The stock yields 4.71% at $63.92 per share, which is about 8% higher than its trailing 5-year average yield of 4.36%:

Realty Income (O)

Realty Income (O)

Over the past ten years, O has underperformed the SPDR S&P 500 ETF (SPY), an ETF designed to track the companies in the S&P 500:

Realty Income (O)

Realty Income (O)

O returned 146% versus the SPY's 224%, a margin of only 0.65-to-1.

If we extend the time frame of comparison to the past 20 years, then O easily outperformed SPY, with total returns of 899% versus SPY's 533%, a margin of 1.69-to-1.

O’s poor recent performance is due to a significant drop in February and March 2020 when the COVID pandemic spooked the markets. While O’s share price has recovered nicely, it’s still about 20% shy of its all-time high!

Let’s consider what a dividend growth investor would get when investing in O.

Here is a chart showing O’s dividend growth history through the end of 2021:

Realty Income (O) Dividend Growth

Realty Income (O) Dividend Growth

O is growing its dividend steadily but at a rather slow pace. Note also that recent increases have been smaller than the 5-year and 10-year DGRs.

O’s revenue is consistently growing, with an increases of 51.86% and 12.64% expected for FY 2022 and FY 2023, respectively:

Realty Income (O)

Realty Income (O)

As mentioned earlier, steady revenue increases at rates exceeding the DGR gives me confidence that the company will continue to pay and periodically increase its dividend.

According to Simply Safe Dividends, O’s adjusted funds from operations (AFFO) of 76% is “low for REITs”:

This means O has plenty of room to continue paying and increasing its dividend.

Portfolio Insight’s fair value [FV] is $128.72, with a 12-month target price of $122.09 (23% upside):

Realty Income (O)

Realty Income (O)

The P/E and chart indicates that O is trading well below its Undervalue Price, whereas the Dividend Yield Fair Value chart indicates that O is trading within its fair value range.

My FV estimate of O is $67, so I think the stock is trading at a discount of about 5%. My Buy Below price is 10% below the FV estimate for stocks with a DVK Quality Snapshots quality score of 17 rated Decent. Therefore, my Buy Below price of O is $61.

For reference, Finbox.com’s FV is $61, CFRA’s FV is $62, Morningstar’s FV is $78, and Simply Wall St’s FV is $114. That’s quite a range of valuations!

According to Portfolio Insight, O scored in the 95th percentile of dividend-paying stocks and earned an A+ Dividend Quality Grade. This indicates O is extremely likely to continue increasing its dividend payout on an annual basis.

Disclosure: Long O

Essex Property (ESS)

ESS is a fully integrated real estate investment trust operating in Southern California, the San Francisco Bay Area, and the Seattle metro area. The company acquires, develops, redevelops, and manages multifamily residential properties. ESS was founded in 1971 and is headquartered in Palo Alto, California.

ESS is a Real Estate Sector stock with a dividend increase streak of 28 years. This makes ESS a member of the Dividend Champions, which are companies that have increased their annual dividend payouts for 25+ consecutive years.

The stock yields 4.21% at $209.00 per share, a yield which is about 40% higher than its trailing 5-year average yield of 3.01%:

Essex Property (ESS)

Essex Property (ESS)

Over the past ten years, ESS has underperformed the SPDR S&P 500 ETF (SPY), an ETF designed to track the companies in the S&P 500:

Essex Property (ESS)

Essex Property (ESS)

ESS returned 91% versus the SPY's 224%, a margin of only 0.41-to-1.

If we extend the time frame of comparison to since 29 October 2004 when ESS started trading, the stock easily outperformed SPY, with total returns of 715% versus SPY's 533%, a margin of 1.34-to-1.

As was the case with O, ESS’s stock price took a big dive in February and March 2020. ESS’s share price has recovered nicely to a new all-time high of $363 per share last December, but it has dropped to the low $200’s since.

Let’s see what a dividend growth investor can expect if they invest in ESS?

Here is a chart showing ESS’s dividend growth history through the end of 2021:

Essex Property (ESS) Dividend Growth

Essex Property (ESS) Dividend Growth

ESS is growing its dividend steadily, but note that recent increases have been smaller than the 5-year and 10-year dividend growth rates [DGRs].

ESS's revenue is generally growing (exceptions are the down years in FY 2000 and FY 2001), with increases of 2.91% and 6.15% expected for FY 2022 and FY 2023, respectively:

Essex Property (ESS)

Essex Property (ESS)

ESS’s revenue growth rate is not quite exceeding its DGR, so smaller increases will be the order of the day. However, ESS’s adjusted funds from operations (AFFO) of 70% is “very low for REITs,” according to Simply Safe Dividends:

This means ESS has plenty of room to continue paying and increasing its dividend.

Portfolio Insight’s fair value [FV] is $276.62, with a 12-month target price of $259.32 (24% upside):

Essex Property (ESS)

Essex Property (ESS)

Both the P/E and Dividend Yield Fair Value charts indicate that ESS is trading well below Undervalue Price

My FV estimate of ESS is $268, so I think the stock is trading at a discount of about 20%. My Buy Below price is 10% below the FV estimate for stocks with a DVK Quality Snapshots quality score of 15 rated Decent. Therefore, my Buy Below price of ESS is $241.

For reference, CFRA’s FV is $203, Finbox.com’s FV is $211, Simply Wall St’s FV is $299, and Morningstar’s FV is $322. That’s quite a range of valuations!

According to Portfolio Insight, ESS scored in the 95th percentile of dividend-paying stocks and earned an A+ Dividend Quality Grade. This indicates ESS is extremely likely to continue increasing its dividend payout on an annual basis.

Disclosure: Long ESS

Concluding Remarks

This article presented three high-yielding, discounted Dividend Growth stocks, all in the Real Estate Sector.

The stocks have A+ Dividend Quality Grades and are extremely likely to continue increasing their dividend payout on an annual basis, according to Portfolio Insight.

All three trade below my FV estimates, but only DLR and ESS also trade below my risk-adjusted Buy Below prices.

The stocks offer attractive yields and reasonable dividend growth rates. They have solid dividend track records, and O and ESS are Dividend Champions with more than 25 years of consecutive dividend increases!

According to Simply Safe Dividends, DLR and ESS have Very Safe dividends, whereas O has a Safe dividend.

All three stocks have A+ (Exceptional) Dividend Quality Grades.

It appears to be a good time for long-term dividend growth investors to invest in these stocks, given their upsides.

I always encourage readers to do their due diligence before buying any stocks I highlight.

Thanks for reading, and take care, everybody!

Please follow me here:

  • Twitter: @div_gro
  • Facebook: @FerdiS.DivGro

I’d be happy to answer any questions you may have!