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7 Dividend Growth Stocks For August 2021

These companies are delivering exceptional earnings and dividend growth, and their stocks are trading at reasonable valuations.

Last month I started a new series that will rank selections of Dividend Radar stocks and present the seven top-ranked stocks for consideration. Dividend Radar tracks stocks trading on U.S. exchanges with dividend increase streaks of at least five years.

Each month, I’ll consider different screens to narrow down the more than 750 Dividend Radar stocks. Screens will focus on various aspects of dividend growth investing, such as dividend yield, dividend growth rate, and stock valuation.

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This month, I screened for stocks of companies that have delivered exceptional earnings growth over the last ten years. Additionally, I screened for stocks trading at reasonable valuations and required a 5-year yield on cost (YoC) of at least 3%.

Screening and Ranking

Earnings and earnings growth are the foundation of dividends and dividend growth. Companies could use debt to pay dividends, such as when earnings temporarily are insufficient to cover dividend payouts. Eventually, though, that debt will have to be repaid from earnings, which, presumably and hopefully, would be sufficient to pay off debt and pay the dividend.

Portfolio Insight provides earnings and earnings growth data that we can monitor to get a sense of a company’s ability to continue paying and increasing dividends. For this month’s article, I considered Non-GAAP EPS compound annual growth rates [CAGRs] for different time frames. Here’s the specific screening formula:

NG EPS 1Y ≥ 10% and NG EPS 3Y ≥ 10% and NG EPS 5Y ≥ 10% and NG EPS 10Y ≥ 10%

Additionally, I screened for stocks trading at reasonable valuations. What I mean by “reasonable” is based on my quality/valuation matrix, which gives preferential treatment to higher quality stocks. Essentially, I’m willing to pay a small premium for the highest quality stocks and I demand a larger discount for lower-quality stocks:

Screen Shot 2021-08-03 at 8.57.53 AM

I calculate Buy Below prices relative to my fair value [FV] estimates based on this quality/valuation matrix.

Finally, I screened for stocks with a 5-year yield on cost [YoC] above 3%. This metric combines the forward yield and 5-year dividend growth rate [DGR] to determine what your dividend would be relative to today’s stock price after five years of investment, assuming the DGR is maintained.

Here is a summary of this month’s screens in general terms:

  1. Exceptional earnings for at least ten years
  2. Reasonable current valuation
  3. Reasonable future dividend income

The latest Dividend Radar (dated July 30, 2021) contains 762 stocks.

Applying the first (fairly stringent) screen reduces the list to only 87 candidates. (Of these, only 20 pass the second screen and only 11 also survive the third screen).

I ranked the candidates by sorting their quality scores (determined via DVK Quality Snapshots) in descending order and used the following metrics, in turn, to break ties:

The tables below show the top seven stocks in rank-order.

7 Top-Ranked Dividend Growth Stocks for August

Here are top-ranked dividend growth stocks that pass this month’s screens:

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I own the six highlighted stocks in my DivGro portfolio.

Below, I provide a table with key metrics of interest to dividend growth investors, including the dividend increase streak (Years), the dividend Yield for a recent share Price, and the 5-year dividend growth rate (5-Yr DGR). The Chowder Number (CDN) and 5-year YoC (5-Yr YoC) are measures of a stock’s future total return and dividend income 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 FV estimate (Fair Value) 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 FV estimates. The last column shows my Buy Below price.

Key metrics and fair value estimates of August’s Top 7 Dividend Growth Stocks (includes data sourced from Dividend Radar).

Key metrics and fair value estimates of August’s Top 7 Dividend Growth Stocks (includes data sourced from Dividend Radar).

I use a survey approach to derive my FV estimates. I collect FV estimates and price targets from several sources, including 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 FV estimate.

Next, let's look at each stock in turn. All data and graphs are courtesy of Portfolio-Insight.com.

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. HD provides installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me, and professional customers.

Screen Shot 2021-08-03 at 9.04.06 AM
HD non-GAAP EPS and dividends paid (TTM), with stock price overlay

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

Lockheed Martin Corporation (LMT)

Founded in 1909 and headquartered in Bethesda, Maryland, LMT is a global security and aerospace company engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems. LMT operates through four segments, Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space Systems.

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

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

BlackRock, Inc. (BLK)

BLK is an investment management company that provides a range of investment and risk management services to institutional and retail clients across the world. The company’s offerings include single and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. BLK was founded in 1988 and is based in New York City.

Screen Shot 2021-08-03 at 9.10.59 AM
BLK non-GAAP EPS and dividends paid (TTM), with stock price overlay

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

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.

Screen Shot 2021-08-03 at 9.23.10 AM
LOW non-GAAP EPS and dividends paid (TTM), with stock price overlay

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

Northrop Grumman Corporation (NOC)

Founded in 1939 and based in Falls Church, Virginia, NOC is a leading global security company with both government and commercial customers. NOC provides systems, products, and solutions in unmanned systems; cyber security; command, control, communications and computers intelligence; surveillance and reconnaissance; and logistics and modernization.

Screen Shot 2021-08-03 at 9.25.45 AM
NOC non-GAAP EPS and dividends paid (TTM), with stock price overlay

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

The Allstate Corporation (ALL)

Founded in 1931 and headquartered in Northbrook, Illinois, ALL is a holding company engaged in property-liability insurance and life insurance in the United States and Canada. The company sells insurance products covering automobiles, homes, and other properties under the Allstate, Esurance, and Encompass brand names. It also sells life insurance and voluntary accident and health insurance products.

Screen Shot 2021-08-03 at 9.28.43 AM
ALL non-GAAP EPS and dividends paid (TTM), with stock price overlay

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

L3Harris Technologies, Inc. (LHX)

LHX, an aerospace and defense technology company, provides mission-critical solutions for government and commercial customers worldwide. The company operates in four segments: Integrated Mission Systems, Space and Airborne Systems, Communication Systems, and Aviation Systems. LHX was founded in 1895 and is headquartered in Melbourne, Florida.

Screen Shot 2021-08-03 at 9.31.36 AM
LHX non-GAAP EPS and dividends paid (TTM), with stock price overlay

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

Concluding Remarks

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In this article, I ranked reasonably valued dividend growth stocks in Dividend Radar that have maintained Non-GAAP EPS growth rates of at least 10% for the past ten years. I also required a 5-year YoC of at least 3%.

I own six of this month’s stocks. With the exception of my ALL position, my positions are all full-sized positions as determined by my dynamic and flexible portfolio target weighting strategy. ALL is underweight and I would need to add about 75 shares to make if a full-sized position. Given ALL’s 18% discount, it appears to be a good time to do so!

I don’t own LHX and it looks like an interesting candidate to consider, though I prefer to open new positions when they offer 5-Year YoC’s of at least 4%. Nevertheless, LHX have impressive growth prospects and a low payout ratio, so I’m going to spend some time researching the stock.

As always, I advise readers to do their due diligence before investing.

Thanks for reading and take care, everybody!

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

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