Skip to main content

8 Best Defensive Dividend Growth Stocks

These high-quality dividend growth stocks have the highest defensiveness scores and may offer a somewhat safer shelter for your investment dollars, provided you buy them at reasonable valuations.

In the December edition of my 7 Dividend Growth Stocks series, I used a defensiveness scoring system developed by David Van Knapp [DVK] as my primary screen. The system awards points to stocks based on satisfying common notions of safety rather than for being members of a particular sector.

In that article, I identified the best defensive stocks that traded below my risk-adjusted Buy Below prices.

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

Today, I want to identify the best defensive dividend growth stocks regardless of their current valuations. While I wouldn’t recommend buying stocks until they trade at more favorable valuations, it is good to have a shortlist of high-quality defensive stocks ready to go!

On Defensiveness

DVK developed a defensiveness scoring system based on how stocks satisfy common notions of safety. I like the system, identifying stocks with defensive characteristics regardless of sector membership.

The scoring system is based on the following “common notions of safety”:

Defensiveness scoring system developed by David Van Knapp (source: A Different Look At 'Defensiveness').

Defensiveness scoring system developed by David Van Knapp (source: A Different Look At 'Defensiveness').

Stocks with lower Beta’s, higher SSD Dividend Safety Scores, better VL Safety Ranks, and better Great Recession Performance, score higher in DVK’s defensiveness scoring system. The maximum possible score is 12 (3 points in each of the four categories).

While most defensive stocks fall in the traditional Defensive Sectors of Consumer Staples, Health Care, and Utilities, there are exceptions! I’ll point these out below.

Screening and Ranking

Portfolio Insight maintains and publishes a spreadsheet of more than 730 dividend growth stocks with dividend increase streaks of at least five years. The latest Dividend Radar (dated December 17, 2021) contains 732 stocks.

I used DVK’s defensiveness scoring system and screened all Dividend Radar stocks for stocks with defensiveness scores in the range of 10-12. There are 26 Dividend Radar stocks that scored 12 points, 36 that scored 11 points, and 50 that scored 10 points.

Below, I present the best defensive stocks in rank order. To rank stocks, I use DVK Quality Snapshots to determine quality scores and sort stocks in descending order by their quality scores, breaking ties using the following metrics, in order as necessary:

Defensiveness Scores

The following tables present defensiveness scores and some key metrics of interest to dividend growth investors. The last two columns show the GICS sector and one of three super sectors, either Defensive (D), Cyclical (C) or Sensitive (S).

Here are descriptions of the other columns:

The Fwd Yield column is colored green if Fwd Yield ≥ 5-Avg Yield.

My risk-adjusted Buy Below prices allow premium valuations for the highest-quality stocks but require discounted valuations for lower-quality stocks.

I use a survey approach to estimate fair value, collecting fair value estimates and price targets from several sources, including Morningstar, Finbox, and Portfolio Insight. Additionally, I estimate fair value using each stock’s five-year average dividend yield. With up to eleven 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.

Stocks Scoring 12 For Defensiveness

Undervalued stocks scoring 12 for defensiveness

Undervalued stocks scoring 12 for defensiveness

I own the five highlighted stocks in my DivGro portfolio.

With its strong forward yield of 3.25% and a discount of 19% below my Buy Below price, Lockheed Martin (LMT) presents the best opportunity here. LMT’s payout ratio is low at 39%, so the company has ample room to continue increasing its dividend in the foreseeable future.

Overvalued stocks scoring 12 for defensiveness

Overvalued stocks scoring 12 for defensiveness

Air Products and Chemicals (APD) and Illinois Tool Works (ITW) have attractive metrics, but investors should wait for better entry points: APD below $292 per share and ITW below $227 per share.

Stocks Scoring 11 For Defensiveness

Undervalued stocks scoring 11 for defensiveness

Undervalued stocks scoring 11 for defensiveness

Merck & Co (MRK) is trading 22% below my Buy Below price and offers a generous 3.65% forward yield. I think MRK presents a good opportunity for dividend growth investors. MRK’s payout ratio is low at 44%, meaning it is likely that the company will continue to increase its dividend at a generous rate.

Overvalued stocks scoring 11 for defensiveness

Overvalued stocks scoring 11 for defensiveness

The Home Depot (HD) is trading 8% above my Buy Below price of $360. The stock yields only 1.70% but has a spectacular 5-year dividend growth rate of 19.4%. I would advise investors to wait for HD to drop below $360 per share before buying shares.

Stocks Scoring 10 For Defensiveness

Undervalued stocks scoring 10 for defensiveness

Undervalued stocks scoring 10 for defensiveness

I like Bristol-Myers Squibb (BMY) here, given its 3.51% forward yield and impressive 5-year dividend growth rate of 16.2%. Moreover, the stock is trading 26% below my Buy Below price of $83. At 27%, the company’s payout ratio is low for biotechs.

Another stock worth considering is Pinnacle West Capital (PNW), which offers a generous 5.01% forward yield and a reasonable (for Utiltiies) 5-year dividend growth rate of 5.8%. It is likely that future dividend increases will be more modest, as the stock’s payout ratio is 66% but increasing rapidly.

Overvalued stocks scoring 10 for defensiveness

Overvalued stocks scoring 10 for defensiveness

Lowe's (LOW) looks interesting given its impressive 5-year dividend growth rate of 16.9%. While the company’s forward yield is a bit low at 1.29%, notice how well the stock has performed on a trailing total return basis over the past five years. Just be sure not to pay more than $235 per share!

Concluding Remarks

DVK’s defensiveness scoring system identifies stocks with defensive characteristics regardless of sector membership. In this article, I identified the best defensive dividend growth stocks in Dividend Radar. There are 26 Dividend Radar stocks that scored 12 points, 36 that scored 11 points, and 50 that scored 10 points.

In the stocks that scored 12 points, 18 or 69% are from the traditional Defensive sectors. Likewise, 19 or 53% of those that scored 11 points, and 24 or 48% of those that scored 10 points, are from the traditional Defensive sectors

I would recommend looking at the following stocks, depending on your investment style and goals:

  • For income investors: PNW
  • For value investors: LMT, MRK
  • For dividend growth-oriented investors: BMY

The following stocks are worth considering if they trade below my Buy Below prices:

  • APD below $292 per share
  • ITW below $227 per share
  • HD below $360 per share
  • LOW below $235 per share

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

Thanks for reading and take care, everybody!

Please follow me here:

  • Twitter: @div_gro
  • Facebook: @FerdiS.DivGro

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!

Also read:

7 Dividend Growth Stocks For December 2021

4 High Yield Closed-End Funds For Your Income Portfolio

2 Dividend Stocks On My Buy List

Focusing On Income, Too Many Stocks & Wrong Valuation: More Mistakes You Could Be Making

18 Dividend Stocks To Consider For The Next Decade

Hybrid Funds To Complement High Yield Portfolios

5 Discounted Dividend Contenders

The Top 10 Dividend Growth Opportunities