Earlier this month, I started a new article series to present the top-ranked dividend growth stocks in each GICS sector. The first article introduced the best dividend growth stocks in the Communication Services sector. Today, we’ll consider dividend growth stocks in the Consumer Discretionary sector.
I focus on investing in stocks that pay ever-increasing dividends. To manage risk, I look for high-quality candidates in different sectors. Diversification across multiple sectors helps to mitigate risk.
I use Dividend Radar as my primary watch list of dividend growth stocks. Dividend Radar is a list of stocks trading on U.S. Exchanges with dividend increase streaks of at least five years. The list is updated and published every Friday and is available for download here. The latest edition (dated June 18, 2021) contains 762 stocks and 47 Consumer Discretionary sector stocks.
This article presents the seven top-ranked dividend growth stocks in the Consumer Discretionary sector.
The Consumer Discretionary Sector
The Consumer Discretionary sector contains companies that sell non-essential goods and services, including appliances, cars, entertainment, lodging, and media. Stocks in this sector are cyclical stocks closely tied to the ups and downs of the economy. When the economy is thriving, these stocks do well because unemployment is low and wages are increasing. In downturns, though, cyclical stocks tend to struggle as consumers are less confident about the future and adjust their spending habits accordingly.
Sector and Performance Comparison
Let’s compare the sector averages and historical performance of the GICS sectors over different periods to see how the Consumer Discretionary sector compares:
The table is color-coded to show the highest (green) and lowest (red) values in each column. The Consumer Discretionary sector has performed exceptionally over the past five years with average returns of 124%, the second-highest after the Information Technology sector.
Sector performance charts give another interesting perspective, especially when comparing those performances to the performance of the S&P 500:
The Consumer Discretionary sector is leading the S&P 500 in the trailing 1-month and 5-year time frames.
I sort the quality scores of DVK Quality Snapshots to rank dividend growth stocks, breaking ties when necessary using the following factors, in turn:
- SSD Dividend Safety Scores
- S&P Credit Ratings
- Dividend Yield
I rarely need to break ties with Dividend Yield.
DVK Quality Snapshots is simple and effective, and I’ve used it since 2019 as a way to assess the quality of dividend growth stocks.
I have my own rating system, which maps directly from quality scores as follows:
Ratings are Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Investment Grade ratings have quality scores in the range of 15-25, while Speculative Grade ratings have scores in the range of 0-14.
Top-Ranked Consumer Discretionary Sector Stocks
Here are the seven top-ranked dividend growth stocks in the Consumer Discretionary Sector:
Note that I’ve highlighted the stocks I own in my DivGro portfolio.
1. NIKE, Inc. (NKE)
Founded in 1964 and headquartered in Beaverton, Oregon, NKE is engaged in designing, developing, marketing, and selling athletic footwear, apparel, equipment, and accessories. The company's portfolio brands include NIKE, Jordan, Hurley, and Converse. NKE sells its products to retail accounts through NIKE-owned retail stores and websites and independent distributors and licensees.
2. The Home Depot, Inc. (HD)
Founded in 1978 and based in Atlanta, Georgia, HD is a home improvement retailer that sells an assortment of building materials, home improvement products, and lawn and garden products. In addition, HD provides installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me, and professional customers.
3. Lowe's Companies, Inc. (LOW)
LOW is a home improvement retailer. The company offers a complete line of products for maintenance, repair, remodeling, and home decorating. It also offers installation services through independent contractors, as well as extended protection plans and repair services. LOW was founded in 1946 and is based in Mooresville, North Carolina.
4. McDonald's Corporation (MCD)
MCD operates and franchises restaurants that serve locally relevant food and drink menus in more than 100 countries worldwide. The company operates primarily as a franchisor, owning the land and building for franchised and company-operated restaurant sites. MCD was founded in 1940 and is based in Oak Brook, Illinois.
5. Starbucks Corporation (SBUX)
SBUX is a roaster, marketer, and retailer of specialty coffee. The company roasts and sells coffees, other beverages, and fresh food items through company-operated stores. It also sells a range of coffee and tea products and licenses its trademarks through other channels. SBUX was founded in 1985 and is based in Seattle, Washington.
6. Target Corporation (TGT)
Founded in 1902 and headquartered in Minneapolis, Minnesota, TGT sells a range of general merchandise and discount food products in about 1,800 stores in the United States. In addition, the company offers everyday essentials and fashionable, differentiated merchandise at discount prices. TGT operates as a single business segment and has a fully integrated online business, Target.com.
7. Gentex Corporation (GNTX)
GNTX designs, develops, manufactures, and markets automatic-dimming rearview mirrors and electronics for the automotive industry; dimmable aircraft windows for the aviation industry; and commercial smoke alarms and signaling devices for the fire protection industry. GNTX was founded in 1974 and is headquartered in Zeeland, Michigan.
Please note that these stocks are candidates for further analysis, not recommendations.
Key Metrics and Fair Value Estimates
Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates. These include the dividend increase streak (Yrs), the DVK quality score (Qual.), the dividend Yield for a recent Price, and the 5-year compound annual dividend growth rate (5-Yr DGR).
I also provide fair value estimates (Fair Val.) to help identify stocks trading at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of the recent price to my fair value estimate.
To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox. Additionally, I estimate fair value using each stock’s 5-year average dividend yield using data from Simply Safe Dividends. Finally, 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.
The top-ranked Consumer Discretionary sector stocks are all Investment Grade stocks, but they have widely varying quality scores, dividend yields, and dividend growth rates. Only LOW and GNTX are discounted relative to my fair value estimates.
NKE is the top-ranked stock in the Consumer Discretionary sector and is the only stock rated Exceptional. With a yield of 0.86% and a 5-year DGR of 11.6%, the stock is likely to provide solid total returns in the future, provided the generous annual dividend increases continue. Income investors should look elsewhere, though.
HD is rated Excellent and yields a decent 2.18%. Trading at about fair value, the stock is a good candidate for dividend growth investors with a growth bias. According to Simply Safe Dividends, HD has the highest 5-year DGR of the seven stocks and a very safe dividend.
Rival LOW has a distinguished dividend history, with 59 consecutive years of higher dividend payouts! This makes LOW a member of an elite group of stocks that are Dividend Kings, Dividend Aristocrats, and Dividend Champions. Last month, LOW announced a spectacular dividend increase of 33%! Available at a discount of 5% to my fair value estimate of $198, I think LOW offers the best investment opportunity at this time.
MCD and SBUX are trading at premium valuations, so I’m not interested in increasing my existing positions at this time. Likewise, TGT is overvalued. Given its quality score of 18, TGT needs to trade at a 10% discount or better before I’d even consider opening a position. In addition, the stock’s low yield and 5-year DGR just don’t compete with the higher-ranked stocks. Similarly, GNTX’s yield and DGR combination are not what I’m looking for, even though the stock is discounted.
This article presented the top-ranked dividend growth stocks in the Consumer Discretionary sector.
Only two of the stocks are discounted (LOW and GNTX), and another is trading at about fair value (HD). At current prices, I think LOW and HD both offer great opportunities for dividend growth investors. HD has a higher quality score and a better yield/DGR combination. Both stocks have easily outperformed the S&P 500 over the past ten years, with HD slightly beating LOW:
Next time, we’ll look at the best Consumer Staples sector stocks.
Thanks for reading!