One way to diversify your portfolio is to invest in different sectors. This article series is intended to help investors identify high-quality stocks in each GICS sector. In case you missed previous articles, here they are:
- 7 Best Communication Services Sector Dividend Stocks
- 7 Best Consumer Discretionary Sector Dividend Stocks
- 7 Best Consumer Staples Sector Dividend Stocks
- 7 Best Energy Sector Dividend Stocks
- 7 Best Financials Sector Dividend Stocks
- 7 Best Health Care Sector Dividend Stocks
- 7 Best Industrials Sector Dividend Stocks
- 7 Best Information Technology Sector Dividend Stocks
To assess the quality of dividend growth stocks, I use DVK Quality Snapshots to assign quality scores. The system employs five quality indicators and assigns 0-5 points to each quality indicator, for a maximum of 25 points. To rank stocks, I sort them by descending quality scores and using tie-breaking metrics where necessary. My watch list for dividend growth stocks is Dividend Radar, a free resource for dividend growth investors. Dividend Radar maintains a list of stocks trading on U.S. Exchanges with a streak of at least five years of higher annual dividend payouts. Dividend Radar is updated and published every Friday and is available for download here. The latest edition (dated September 10, 2021) contains 749 stocks. Only 49 of these stocks fall in the Materials sector.
The Materials Sector
The Materials sector contains a wide range of commodity-related manufacturing industries. Companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, are included in this sector. The Materials sector is the smallest by capitalization of the 11 sectors in the S&P 500, representing only 2.53% of the index as of May 29, 2020.
Sector and Performance Comparison
Let’s compare the sector averages and historical performance of the GICS sectors over different periods to see how the Materials sector compares:
The table is color-coded to show each column’s highest (green) and lowest (red) values. The Materials sector has performed poorly over the past 1-month and 3-month time frames and has one of the smallest average market caps of the 11 GICS sectors.
Sector performance charts give another interesting perspective, especially when comparing those performances to the performance of the S&P 500:
The Materials sector underperformed the S&P 500 in every trailing time frame!
I use DVK Quality Snapshots to assess the quality of dividend growth stocks. The system employs five quality indicators and assigns 0-5 points to each quality indicator, for a maximum of 25 points. To rank stocks, I sort them by descending quality scores and break ties by using the following factors, in turn:
- SSD Dividend Safety Scores
- S&P Credit Ratings
- Dividend Yield
I rate stocks by quality score as 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 quality scores below 15.
Top-Ranked Materials Sector Stocks
Here are the seven top-ranked dividend growth stocks in the Materials sector:
Note that I’m long only one of these stocks in my DivGro portfolio (APD).
1. Ecolab Inc (ECL)
Founded in 1923 and headquartered in St. Paul, Minnesota, ECL provides water, hygiene, and infection prevention solutions and services worldwide. ECL’s cleaning and sanitizing products, pest elimination services, and equipment maintenance and repair services support customers in various sectors, including foodservice, food and beverage processing, hospitality, healthcare, retail, textile care, and commercial facilities management.
2. Air Products and Chemicals, Inc. (APD)
Founded in 1940 and headquartered in Allentown, Pennsylvania, APD produces atmospheric gases (such as oxygen and nitrogen), process gases (such as hydrogen and helium), and specialty gases, as well as the equipment for the production and processing of gases. APD also provides semiconductor materials, refinery hydrogen, natural gas liquefaction, and advanced coatings and adhesives.
3. PPG Industries, Inc. (PPG)
PPG manufactures and distributes a variety of coatings, specialty materials, and glass products. The company’s Performance Coatings segment provides light industrial and specialty coatings, protective and marine coatings and finishes, and sealants. The company also operates in two additional segments: Industrial Coatings and Glass. PPG was founded in 1883 and headquartered in Pittsburgh, Pennsylvania,
4. The Sherwin-Williams Company (SHW)
SHW develops, manufactures, distributes, and sells paints, coatings, and related products to professional, industrial, commercial, and retail customers in North and South America, the Caribbean, Europe, Asia, and Australia. The company operates in three segments: The Americas Group, Consumer Brands Group, and Performance Coatings Group. SHW was founded in 1866 and is headquartered in Cleveland, Ohio.
5. International Flavors & Fragrances Inc. (IFF)
Founded in 1833 and headquartered in New York, New York, IFF creates, manufactures, and supplies flavors and fragrances for use in a variety of consumer products. IFF provides flavor compounds to the food and beverage industries, and fragrance compounds and ingredients to manufacturers of cosmetic and personal care products.
6. Linde plc (LIN)
Founded in 1907 and based in Guildford, the United Kingdom, LIN operates as an industrial gas and engineering company. The company offers a variety of gases, including rare gases, electronic gases, specialty gases, shielding gases, and noble gases. LIN also develops and distributes procedures and systems for gas applications.
7. NewMarket Corporation (NEU)
Founded in 1887 and headquartered in Richmond, Virginia, NEU is a holding company that operates businesses involving petroleum additives. The company offers lubricant additives for use in various vehicle and industrial applications. NEU has operations in the United States, Canada, Europe, the Asia Pacific, India, Latin America, and the Middle East.
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 (Years), the forward dividend Yield for a recent share Price, and the 5-year compound annual dividend growth rate (5-Yr DGR). The 5-year Yield on Cost (5-Yr YoC) and Chowder Number (CDN) are measures of a stock’s dividend income and future total return prospects, while the 5-year trailing total returns (5-Yr TTR) is a measure of the stock’s performance over the past five years.
I also provide the five quality indicators used in determining each stock's quality score (Qual), as well as my Fair Value estimate to help identify stocks that trade at favorable valuations. The discount/premium column (-Disc/+Prem) shows the discount or premium of a recent share price to my fair value estimates.
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 Portfolio Insight. 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.
Two of the top-ranked Materials sector stocks are rated Excellent, while the remaining stocks are rated Fine.
Only APD and NEU are discounted and trade below my risk-adjusted Buy Below price.
It is fascinating to compare the relative performances of these stocks. Consider the following chart showing the total returns (price appreciation and dividends) of the top-ranked Materials sector stocks over the trailing 5-year time frame:
Only two Materials sector stocks (SHW, LIN) outperformed the SPDR S&P 500 ETF (SPY), an ETF designed to track the 500 companies in the S&P 500 index.
I‘m long APD, the only Materials sector stock I think is worth considering at this time. APD has a respectable yield and a strong 5-year DGR of 11.2%, so the stock has good dividend income and growth prospects. Furthermore, APD’s dividend is deemed Very Safe by Simply Safe Dividends.
According to Simply Safe Dividends, APD’s earnings payout ratio of 65% is “edging high most companies.” Future dividend increases may be tempered if earnings should decline.
The only other stock trading at a discounted valuation is NUE, which yields 2.53% and has a modest 5-year DGR of 4.2%. I cannot recommend the stock, though, as it appears to have stagnant earnings and dividend growth:
NUE’s stock price is suffering accordingly and the stock has delivered negative total returns over the past five years.
This article presented the seven top-ranked dividend growth stocks in the Materials sector. Based on my rating system that maps from DVK Quality Snapshots to quality scores, two stocks are rated Excellent, and five are rated Fine. Only two stocks trade below my risk-adjusted Buy Below prices, APD and NEU.
In my opinion, APD provides the best investment opportunity at this time. Available at a forward dividend yield of 2.23% and with strong dividend growth, I think the stock should deliver solid dividend income and growth in the next five years.
Thanks for reading!
Next time, we’ll look at the best Real Estate sector stocks.
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- Twitter: @div_gro
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I’d be happy to answer any questions you may have!