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The Top 10 Dividend Growth Opportunities

These high-quality Dividend Radar stocks offer the best opportunities for dividend growth investors. Each stock is trading below my risk-adjusted Buy Below prices and offers generous and safe dividends and strong total return prospects.

This article wraps up my article series on high-quality stocks in each of the . The series of 11 articles presented the 7 highest-ranked dividend growth stocks [DG] in each GICS sector, for a total of 77 stocks. Today, I’m presenting the top opportunities out of these 77 stocks.

In case you missed any of the articles in this series, here they are:

, a list of stocks trading on U.S. Exchanges with dividend increase streaks of five or more years. Dividend Radar is a free resource for DG investors, maintained and published every Friday by .

I generally use five stock selection criteria when selecting DG stocks for my portfolio. The criteria relate to stock quality, dividend safety, growth outlook, income outlook, and stock valuation. For this article, I used the following screens to select the top ten DG opportunities:

.
  • Growth Outlook: Stocks likely or somewhat likely to deliver annualized total returns of at least 8%, according to the .
  • Income Outlook: Stocks with a 5-year yield on cost of 3.5% or higher.
  • Stock Valuation: Stocks trading no more than 3% above my risk-adjusted Buy Below prices.
  • I use to assess the quality of DG stocks. The system employs five quality indicators and assigns 0-5 points to each quality indicator, for a maximum of 25 points. To 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 DG stocks by quality score as Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Only stock rated Exceptional, Excellent, or Fine qualified for this article.

    I routinely estimate the fair value [FV] to identify candidates trading at favorable valuations. By a favorable valuation, I mean a risk-adjusted Buy Below price that allows a premium of up to 10% for Exceptional stocks and a premium of up to 5% for Excellent stocks but requires FV or below for stocks rated Fine.

    The Top 10 Dividend Growth Opportunities

    Here are the DG stocks that present the best opportunities for investment at this time:

    Screen Shot 2021-10-18 at 7.57.28 AM

    Note that I’m long the highlighted stocks in my DivGro portfolio.

    1. Merck & Co., Inc. (MRK)

    Founded in 1891 and headquartered in Kenilworth, New Jersey, MRK is a global health care company that offers health solutions through prescription medicines, vaccines, biologic therapies, and animal health products. MRK markets its products to drug wholesalers and retailers, hospitals, government entities and agencies, physicians, physician distributors, veterinarians, distributors, animal producers, and managed health care providers.

    quality score
  • Fwd Yield: forward dividend yield for a recent share Price
  • 5-Avg Yield: 5-year average dividend yield
  • 5-DGR: 5-year compound annual growth rate of the dividend
  • 5-YOC: the projected yield on cost after five years of investment
  • C#: , a popular metric for screening dividend growth stocks
  • 5-TTR: 5-year compound trailing total returns
  • VL Safety Rank: 's
  • VL Fin Stren: Value Line's ratings
  • MS Econ Moat: 's
  • S&P Cred Rating: 's
  • SSD Divi Safety: '
  • Buy Below: my risk-adjusted buy below price
  • –Disc +Prem: discount or premium of the recent share Price to my Buy Below price
  • Price: recent share price
  • Screen Shot 2021-10-18 at 8.00.21 AM
    Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

    Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

    Commentary

    Six stocks are rated Excellent (quality scores 23-24), and four are rated Fine (quality scores 19-22).

    Only three stocks are not trading below my risk-adjusted Buy Below prices. The exceptions are HD, PEG, and UNP, trading just above my Buy Below prices. Depending on your risk tolerance, those stocks may be suitable candidates, too.

    AEP, LMT, MRK, and WEC each have a forward yield that exceeds the corresponding 5-year average dividend yield. This means these stocks have attractive current forward yields relative to past dividend yields.

    At 3.54%, AEP offers the highest forward yield of the ten candidates. Along with LMT, MRK, PEG, and WEC, all yielding more than 3%, these are good candidates for income investors.

    Based on their past 5-year dividend growth rates, the best dividend growth candidates are APD, HD, ITW, TROW, and UNP. All of these stocks boast double-digit percentage dividend growth rates.

    TROW has delivered annualized total returns of around 28% over the past five years! Those are impressive returns! With 23.5%, HD is not far behind.

    It is pretty informative to compare the trailing 10-year total returns (price appreciation and dividends) of these stocks:

    Comparison of the total returns of five DG candidates that outperformed SPY over the past ten years (source: Portfolio-Insight.com)

    Comparison of the total returns of five DG candidates that outperformed SPY over the past ten years (source: Portfolio-Insight.com)

    Over the 10-year timeframe, HD, ITW, LMT, TROW, and UNP outperformed the SPDR S&P 500 ETF (SPY). SPY is an exchange-traded fund designed to track the 500 companies in the S&P 500 index. HD was the top-performer, returning a spectacular 1,108% or about 28.29% annualized.

    On the other hand, AEP, APD, MRK, PEG, and WEC underperformed SPY:

    Comparison of the total returns of five DG candidates that underperformed SPY over the past ten years (source: Portfolio-Insight.com)

    Comparison of the total returns of five DG candidates that underperformed SPY over the past ten years (source: Portfolio-Insight.com)

    Best Opportunities in Each GICS Sector

    The top 10 DG opportunities represent only six of the eleven GICS sectors:

    • Consumer Discretionary: HD
    • Financials: TROW
    • Health Care: MRK
    • Industrials: ITW, LMT, UNP
    • Materials: APD
    • Utilities: AEP, PEG, WEC

    Here are the best opportunities in the other GICS Sectors:

    • Communication Services: Comcast (CMCSA)
    • Consumer Staples: PepsiCo (PEP)
    • Energy: Chevron (CVX)
    • Information Technology: Intel (INTC)
    • Real Estate: Digital Realty Trust (DLR)
    Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

    Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

    Note that none of these stocks passed all of my selection criteria for this article:

    • INTC: C# indicates that the stock is unlikely to deliver annualized total returns of at least 8%
    • PEP: 3.51% premium to my Buy Below price
    • CMCSA: 5-YOC lower than 3.5%
    • CVX: Dividend Safety Score not above 80
    • DLR: Quality score below 19 and 13.95% premium to my Buy Below price

    Thanks for reading!

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    Also read:

    My Dividend Growth Investing Buying Process

    How To Generate Income From Stocks You Don't Own

    7 Best Utilities Sector Dividend Stocks

    3 Industrial Stocks To Build Your Dividend Growth Portfolio

    7 Dividend Growth Stocks For October 2021

    The Brookfield Family: Earn Dividends & Diversify Your Portfolio

    Supersizing Your Annual Dividends & Generating Additional Income By Selling Covered Calls

    7 Best Real Estate Sector Dividend Stocks