The Only Dividend Radar Stocks With Perfect Quality Scores

These seven dividend growth stocks are rated Exceptional, scoring 25 out of 25 points based on DVK Quality Snapshots.
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My watch list for candidates is Dividend Radar, 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 free download here. The latest edition (dated July 23, 2021) contains 762 stocks.

DVK Quality Snapshots provide a simple yet elegant way to assess the quality of dividend stocks. Devised by David Van Knapp, the system assigns 0-5 points to each of five quality indicators for a maximum quality score of 25 points. Only seven Dividend Radar stocks have perfect quality scores, and I rate these stocks Exceptional.

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Dividend growth investing is a long-term endeavor. While I prefer to buy stocks at discounted valuations, the highest-quality dividend growth stocks rarely trade at discounted valuations! For that reason, I’m willing to pay a premium of up to 10% for stocks rated Exceptional. In my view, it is better to get into the game than to wait on the sidelines for an ideal entry point.

The Exceptional Seven

Here are the seven Dividend Radar stocks with perfect quality scores:

Screen Shot 2021-07-28 at 8.35.07 AM
Screen Shot 2021-07-28 at 8.36.25 AM

Note that I’m long all these stocks in my DivGro portfolio.

The following company descriptions are my summary of company descriptions sourced from Finviz.

1. Johnson & Johnson (JNJ)

Founded in 1886 and based in New Brunswick, New Jersey, JNJ has grown into one of the largest companies in the world. The company is a leader in the pharmaceutical, medical device, and consumer products industries. JNJ distributes its products to the general public, retail outlets and distributors, wholesalers, hospitals, and health care professionals.

2. Microsoft Corporation (MSFT)

Founded in 1975 and based in Redmond, Washington, MSFT is a technology company with worldwide operations. The company’s products include operating systems, cross-device productivity applications, server applications, productivity and business solutions applications, software development tools, video games, and online advertising. MSFT also designs, manufactures, and sells several hardware devices.

3. The Procter & Gamble Company (PG)

Founded by William Procter and James Gamble, PG is focused on providing branded consumer packaged goods in more than 180 countries. PG has five reportable segments: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. The company was incorporated in Ohio in 1905 and is headquartered in Cincinnati, Ohio.

4. 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.

5. Visa Inc. (V)

Headquartered in San Francisco, California, V operates as a payments technology company worldwide. The company facilitates commerce by transferring value and information among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. V provides its services under the Visa, Visa Electron, Interlink, V PAY, and PLUS brands.

6. Automatic Data Processing, Inc. (ADP)

ADP provides technology-enabled human capital management solutions and business process outsourcing solutions. These offerings include payroll services, benefits administration, talent management, HR management, time and attendance management, insurance services, retirement services, and tax and compliance services. ADP was founded in 1949 and is headquartered in Roseland, New Jersey.

7. Accenture plc (ACN)

Founded in 1989 and is based in Dublin, Ireland, ACN provides management and technology consulting services to clients in various industries and geographic regions, including North America, Europe, and Growth Markets. ACN’s operating segments are Communications, Media & Technology; Financial Services; Health and Public Service; Products; and Resources.

Key Metrics and Fair Value Estimates

Below, I present a table with key metrics of interest to dividend growth investors. These include the 5-year compound annual dividend growth rate (5-Year DGR), the 5-year yield on cost (5-Year YoC), and the so-called Chowder Number (CDN). Also included are the five quality indicators used by DVK Quality Snapshots:

I provide fair value estimates to help identify stocks that trade at favorable valuations and show the discount (–Disc) or premium (+Prem) of a recent price to my fair value estimate. The last column shows each stock’s Buy Below price, which is 10% above my fair value estimate. As mentioned in the introduction, I’m willing to pay a premium of up to 10% for Exceptional stocks.

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. 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 only Dividend Radar stocks with perfect (25/25) quality scores. I rank stocks by descending quality scores and using various tie-breaking metrics in order: first SSD Divi. Safety, then S&P Credit Rating, and, if necessary, Forward Yield.

The only Dividend Radar stocks with perfect (25/25) quality scores. I rank stocks by descending quality scores and using various tie-breaking metrics in order: first SSD Divi. Safety, then S&P Credit Rating, and, if necessary, Forward Yield.

Let’s compare these stocks based on various metrics using tools provided by Portfolio Insight.

Trailing Total Returns

First, consider trailing total returns over the past ten years, which includes dividend income and share price appreciation:

The compound annual growth rate [CAGR] of trailing total returns over the past ten years (source: Portfolio-Insight.com)

The compound annual growth rate [CAGR] of trailing total returns over the past ten years (source: Portfolio-Insight.com)

With total returns of 1,220% over the past ten years, MSFT is the top-performing stock. A $10,000 investment in MSFT ten years ago would now be worth just more than $110,000 or $130,000 with dividends reinvested. V’s total return over the same period is 1,124%, while NKE returned 738%. In comparison, the S&P 500 (as represented by SPDR S&P 500 Trust ETF, SPY) returned 311%.

I find it fascinating that the two stocks with the highest yields (JNJ, 2.46%, and PG, 2.47%) have the lowest trailing total returns of the seven stocks. It appears that dividend yield is a poor predictor of total returns. On the other hand, MSFT, V, and NKE have strong 5-year DGRs, which, I think, is a somewhat better predictor of total returns.

Dividend Growth

V has grown its dividend most over the past ten years, followed by ACN, MSFT, and NKE:

The compound annual dividend growth rate over the past ten years (source: Portfolio-Insight.com)

The compound annual dividend growth rate over the past ten years (source: Portfolio-Insight.com)

Ten years ago, V paid an annualized dividend of 15¢ per share, whereas today, V pays an annualized dividend of $1.28 per share. Ten years ago, V traded around $22 per share (versus about $250 today).

Only JNJ and PG have 10-year DGRs below the average 10-year DGR of the S&P 500.

Revenue and Earnings Growth

I also consider long-term revenue and earnings growth. Without sustained revenue and earnings growth, a company would find it difficult to grow its dividend. Here, again, V, MSFT, and NKE are the top-performing stocks:

The total revenue growth (CAGR) over the past ten years (source: Portfolio-Insight.com)

The total revenue growth (CAGR) over the past ten years (source: Portfolio-Insight.com)

Non-GAAP EPS growth (CAGR) over the past ten years (source: Portfolio-Insight.com)

Non-GAAP EPS growth (CAGR) over the past ten years (source: Portfolio-Insight.com)

Interestingly, JNJ tops the list here, with ACN just behind it in second place. It appears that NKE, V, and MSFT are investing more in growth opportunities, whereas JNJ and ACN have relatively stable and slow-growing businesses.

Long-Term Debt To Capital Ratio

I also like to consider the financial leverage, such as the long-term debt to capitalization ratio. This metric indicates investment risk. High ratios indicate riskier investments, as debt is the primary source of financing and introduces a more significant risk in times of rising interest rates.

Long-term Debt to Capital (source: Portfolio-Insight.com)

Long-term Debt to Capital (source: Portfolio-Insight.com)

NKE’s long-term debt to capital ratio is the highest, though not nearly in the danger-zone territory. These are all stocks with solid financials, as evidenced in their superior S&P Capital Ratings.

Valuation

Not surprisingly, all of the stocks are trading at premium valuations.

For conservative investors, I would suggest waiting for more favorable entry points. Usually, a price-point about 10% below my fair value estimate would be appropriate. Unless the stock market experience a correction, it is unlikely that these high-quality stocks will trade that low anytime soon.

I allow some leeway when determining Buy Below prices for high-quality stocks, based on the following quality/valuation matrix:

Screen Shot 2021-07-28 at 8.48.57 AM

Only two stocks are trading below my Buy Below prices, JNJ and PG.

According to Portfolio Insight’s earnings-based valuation chart (5 years + 2 years earnings estimates), JNJ is trading in the fair value range and essentially at the estimated fair value price of $172.52:

JNJ’s fair value price is $172.52 based on the Non-GAAP EPS-based valuation chart (source: Portfolio-Insight.com)

JNJ’s fair value price is $172.52 based on the Non-GAAP EPS-based valuation chart (source: Portfolio-Insight.com)

Note JNJ’s twelve-month upside of 8%, which is determined via extrapolating the fair value price assuming that earnings estimates would materialize.

Likewise, PG’s fair value estimate can be determined as $132.13, meaning the stock is trading at a bit of a premium valuation:

PG’s fair value price is $132.13 based on the Non-GAAP EPS-based valuation chart (source: Portfolio-Insight.com)

PG’s fair value price is $132.13 based on the Non-GAAP EPS-based valuation chart (source: Portfolio-Insight.com)

Note that PG’s twelve-month upside is only 3%, confirming that the stock is trading above fair value presently.

Concluding Remarks

This article presented the only Dividend Radar stocks with perfect quality scores and Exceptional ratings. These seven stocks are high-quality stocks worthy of inclusion in your dividend growth portfolio. Unfortunately, all seven stocks are trading at premium valuations, and only two stocks, JNJ and PG, are selling reasonably close to fair value that I’d consider buying more shares.

For most investors, I would recommend waiting for more favorable entry points. The wait might be extended, though, as high-quality stocks rarely trade below fair value. A market correction may be needed to see share prices drop below my Fair Value estimates. If, like myself, you don’t mind paying a small premium, then wait for the share price to drop below my Buy Below price. (JNJ and PG are trading below their Buy Below prices now).

Thanks for reading!

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