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4 Dividend Aristocrats With Favorable Valuations

These dividend growth stocks have increased their dividend payouts every year for at least 25 years, and they are fairly valued now!

Last week I presented 3 Dividend Kings With Favorable Valuations. Today, I’m repeating the same exercise for the S&P 500 Dividend Aristocrats, an elite list of companies that have paid higher dividends every year for at least 25 consecutive years.

The list of Dividend Aristocrats is maintained by S&P Dow Jones Indices and is updated annually in January. To be included in the list, stocks must be in the S&P 500, have dividend increase streaks of 25 years or more, and have a market capitalization of at least $3 billion. Presently, there are only 65 stocks Dividend Aristocrats.

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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 four Dividend Aristocrats measured against my stock selection criteria.

Stock Selection Criteria

My watch list of dividend growth stocks is Dividend Radar, an automatically generated spreadsheet listing stocks with dividend increase streaks of at least five years. Updated and published every Friday, Dividend Radar is a free resource for dividend growth investors. The latest edition (September 17, 2021) contains 748 dividend growth stocks.

I use five stock selection criteria when picking dividend growth stocks for my DivGro portfolio. These criteria relate to stock quality, dividend safety, growth outlook, income outlook, and stock valuation. Here are the specific screens I used to select Dividend Aristocrats for this article:

  1. Stock Quality: Stocks with quality scores of 15-25, considered Investment Grade stocks
  2. Dividend Safety: Stocks with Very Safe and Safe Dividend Safety Scores
  3. Growth Outlook: Stocks likely to deliver annualized total returns of at least 8%,
  4. Income Outlook: Stocks with the best dividend income prospects in coming years
  5. Stock Valuation: Stocks trading below my risk-adjusted Buy Below prices

Following is a summary of these criteria as they relate to the Dividend Aristocrats:

Stock Quality

DVK Quality Snapshots provides an eloquent way to determine quality scores for dividend growth stocks. Based on their quality scores, I rate stocks as Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). For this article, I considered Investment Grade stocks with quality scores 15-25:

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

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

Dividend Safety

Simply Safe Dividends provide Dividend Safety Scores that predict dividend risk over a complete economic cycle. For this article, I selected Dividend Aristocrats with Very Safe (81-100) and Safe (61-80) Dividend Safety Scores.

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

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

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 total returns of at least 8%.

Chart by the author (data source: Portfolio Insight)

Chart by the author (data source: Portfolio Insight)

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 green if it is at least 4.00%.

Chart by the author (data source: Portfolio Insight)

Chart by the author (data source: Portfolio Insight)

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

I use a survey approach to estimate fair value, 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 Aristocrats Meeting All The Criteria

Only four Dividend Aristocrats meet all the criteria stated above:

Screen Shot 2021-09-21 at 11.24.47 AM

The table 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.

Let’s look at these Dividend Aristocrats in turn:

Medtronic plc (MDT)

MDT manufactures and sells device-based medical therapies to hospitals, physicians, clinicians, and patients worldwide. The company operates in four segments: Cardiac and Vascular Group, Minimally Invasive Therapies Group, Restorative Therapies Group, and Diabetes Group. MDT was founded in 1949 and is headquartered in Dublin, Ireland.

Screen Shot 2021-09-21 at 11.26.59 AM
MDT non-GAAP EPS and dividends paid (TTM), with stock price overlay

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

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 2021-09-21 at 11.30.01 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

Franklin Resources, Inc (BEN)

BEN is a global asset management holding. Its subsidiaries provide investment management and related services to individuals, institutions, pension plans, trusts, and partnerships. BEN was founded in 1947 and is based in San Mateo, California, with an additional office in Hyderabad, India.

Screen Shot 2021-09-21 at 11.31.27 AM
BEN non-GAAP EPS and dividends paid (TTM), with stock price overlay

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

AbbVie Inc (ABBV)

ABBV is a worldwide, research-based biopharmaceutical company that develops and markets products to treat conditions such as rheumatoid arthritis, psoriasis, and Crohn's disease; hepatitis C; human immunodeficiency virus; endometriosis; thyroid disease; Parkinson's disease; and chronic kidney disease and cystic fibrosis. ABBV was incorporated in 2012 and is based in North Chicago, Illinois.

Screen Shot 2021-09-21 at 11.35.15 AM
ABBV non-GAAP EPS and dividends paid (TTM), with stock price overlay

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

Concluding Remarks

Screen Shot 2021-09-21 at 11.38.24 AM

This article presented four Investment Grade Dividend Aristocrats that are fairly valued now. MDT and ITW are rated Excellent, while BEN and ABBV are rated Decent.

All four stocks are trading below my risk-adjusted Buy Below prices, and BEN and ABBV are trading at discounted valuations.

The stocks have solid dividend track records with more than 25 years of increasing annual dividend payments. They have high income and growth prospects and safe dividends. ABBV offers the highest forward yield at 4.90% and the highest 5-year dividend growth rate of 18.1%. Based on the Chowder Rule, all four stocks likely will deliver annualized total returns of at least 8%, and all four stocks should yield at least 4% on cost after five years of investment, assuming their current dividend growth rates are maintained.

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

Note: Interested in getting periodic e-mail notifications when articles are published here? Drop your e-mail in the box below!

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