Dividend growth stocks pay higher dividends year after year. I use Dividend Radar as my primary watchlist of such stocks. Updated and published every Friday, Dividend Radar tracks stocks trading on U.S. exchanges with higher dividend payments every year for at least five years.
Simply Safe Dividends provide Dividend Safety ScoresTM that measure dividend risk over a full economic cycle. Investing in companies with Very Safe or Safe dividends would have avoided 98% of all dividend cuts since 2015.
In addition to dividend safety, I look for high-quality but undervalued stocks.
An elegant and effective way to assess the quality of dividend growth stocks is to use DVK Quality Snapshots. The system employs five widely used quality indicators from independent sources and assigns 0-5 points to each quality indicator, for a maximum of 25 points.
To estimate fair value, I use a crowdsourcing approach by collecting fair values and price targets from reliable online sources like Morningstar and Finbox.com. Using as many as 11 available estimates per stock, I arrive at a reasonable fair value estimate by averaging the mean (average) and median (middle value) of the surveyed estimates.
In this article, I’m presenting five high-quality, discounted dividend growth stocks with safe or very safe dividends.
5-Year Yield on Cost [YoC]
Recently, I received an e-mail from a reader, Bob, in which he explained an interesting approach to stock selection. All else being equal, Bob prefers to invest in stocks whose 5-year YoC is at least 4%. I found his approach intriguing and decided to study this metric.
Assume you buy a stock today and hold it for five years. If the company continues to increase its dividend at the same dividend growth rate [DGR] as over the past five years, your 5-year YoC would be the dividend you receive annually relative to today’s stock price.
To calculate the 5-year YoC is easy:
- 5-year YoC = Forward Dividend Yield × (1 + 5-year DGR)^5
Here, ^5 means to the 5th power.
Note there is no guarantee that a company will continue its dividend increases at the same rate, so we try to find high-quality dividend growth stocks with safe dividends, paying special attention to the stock’s dividend and earnings growth histories.
For this article, I used the following screens:
- Dividend Radar member (one of 762 dividend growth stocks)
- Quality Score ≥ 15 (investment grade stocks)
- Dividend Safety Score > 60 (very safe and safe dividends)
- Stock Price < Fair Value (undervalued stocks)
- Favorable Chowder Numbers only (see below)
- Acceleration Factor ≥ 0.9 (see below)
The Chowder Number (CDN) is a popular metric for screening dividend growth stocks. The CDN is obtained by summing the forward dividend yield and the 5-year DGR of a stock.
I consider CDNs favorable if the following conditions hold:
- For yields < 3%, CDN ≥ 15
- For yields ≥ 3%, CDN ≥ 12
- For utilities with yields ≥ 4%, CDN ≥ 8
Stocks with favorable CDNs are likely to deliver annualized returns of 8% or more, according to the Chowder Rule.
The (dividend growth) acceleration factor indicates if a stock’s dividend growth is accelerating (values above 1.00) or decelerating (values below 1.00). For this article, I divided the 3-year DGR by the 5-year DGR and screened for values greater than 0.9. This means I allowed for some deceleration, but not too much.
The following stocks passed my screens:
The table presents key metrics of interest to dividend growth investors. I included the quality score according to DVK Quality Snapshots and the five quality indicators that make up that score. I also provide fair value estimates and show the discount (Disc.) or premium (Prem.) of a recent price to my fair value estimate.
Finally, I inspected graphs of the Non-GAAP earnings per share [EPS] of the shortlisted stocks and rejected stocks with irregular EPS over the past ten years. Additionally, I confirmed that each remaining candidate exhibited consistent revenue growth over the past 10 years.
Here are the tickers that passed my final inspection:
Next, let's look at each stock in turn. All data and graphs are courtesy of Portfolio-Insight.com.
Pinnacle West Capital Corporation (PNW)
PNW is a holding company that provides retail and wholesale electric services primarily in the state of Arizona. Its subsidiary, Arizona Public Service Company, is a vertically integrated electric that generates, transmits, and distributes electricity using coal, nuclear, gas, oil, and solar resources. PNW was founded in 1920 and is headquartered in Phoenix, Arizona.
Snap-on Incorporated (SNA)
SNA manufactures and markets tools, equipment, diagnostics, repair information, and systems solutions. It serves aviation and aerospace, agriculture, construction, government and military, mining, natural resources, power generation, and technical education industries, as well as vehicle dealerships and repair centers. SNA was founded in 1920 and is headquartered in Kenosha, Wisconsin.
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.
NorthWestern Corporation (NWE)
NWE provides electricity and natural gas to residential, commercial, and industrial customers in Montana, Nebraska, and South Dakota. The company generates, transmits, and distributes electricity. It also produces, stores, transmits, and distributes natural gas. NWE was founded in 1923 and is based in Sioux Falls, South Dakota.
Evercore Inc. (EVR)
EVR is an independent investment banking advisory firm that provides advisory services to prominent multinational corporations on significant mergers, acquisitions, divestitures, restructurings, and other strategic corporate transactions. The company also has successful investment management. EVR was founded in 1996 and is based in New York, New York.
In this article, I presented five discounted dividend growth stocks with very safe or safe dividends, according to Simply Safe Dividends. Each stock has a favorable CDN, consistent earnings growth over the past ten years, and an acceleration factor for dividend growth of at least 0.9.
I introduced the 5-year YoC metric, which provides an interesting way to screen for dividend growth stocks. Each of the highlighted stocks should deliver a yield on cost of at least 4% in five years’ time, assuming dividend increases happen at the same rate as over the past five years.
The included charts show a strong correlation between earnings growth and stock price growth. Earnings are growing nicely and, if the current trend continues and given their low payout ratios, these companies should have no problem continuing with their generous dividend increases.
As always, I advise readers to do their own due diligence before investing.
Thanks for reading!
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