In this article, our focus is on selecting and highlighting stocks that have been growing their dividends in the recent past at a rapid pace and, more than likely will continue to do so in the future for at least the next 3-5 years. However, such stocks usually do not pay very high current yields, and we should be content with a 2% to 2.5% current yield.
If you need higher yields, please read the most recent article from our monthly series titled “5 Relatively Safe and Cheap DGI,” which focuses on moderate to high current income-favoring high-yield names. Irrespective of the fact whether your goal is high dividend growth or high current income, we always need to pay attention to the quality of companies that we invest in and the price we pay
Note: Please note that the stocks shortlisted and highlighted in this article are not buy recommendations per se but rather candidates for further research. Please use your due diligence, considering your personal goals and risk tolerance, before making any investments. Also, some of the sections in the article (Introduction, Selection methodology/process, etc.) will be repetitive from month to month for the benefit of the new readers. Such sections would be displayed in “italics,” and regular readers could skip them.
Why High Growth Dividend Stocks?
There are two types of dividend stocks that a DGI investor can choose from depending upon their individual situation, goals, and investing time horizon:
- High Growth Low Yield [HGLY]
- Low Growth High Yield [LGHY].
As the names suggest, the HGLY category would have stocks that offer a high rate of dividend growth but usually a low current yield. These stocks would normally have low payment ratios, manageable levels of debt, and rapidly rising earnings.
On the other hand, LGHY-type of stocks would offer a high current yield (generally 3% and higher) but a lower rate of dividend growth. Generally speaking, these companies are more mature and stable businesses that have their hyper-growth period in the rearview but still grow modestly over time to support a low but stable growth in dividends.
Obviously, there will be stocks that fit somewhere in between these two categories, for example, medium growth and medium current yield.
So, who should own HGLY-type stocks? Basically, anyone who is in the accumulation phase and does not need the income currently and/or in the next five to ten years should own some high-growth dividend stocks. In addition, folks, including retirees, who have a large investment capital that generates more income than they need currently (for example, 1.5x or 2x their income needs) should invest at least partially in HGLY type of stocks.
How To Structure A Portfolio Based On This Series
Though it would depend a great deal on your personal goals, risk tolerance, investment methodology, and choices; however, if you wish to make a portfolio based on this monthly series, here is one way to do it:
- Make a portfolio budget and provision to have a maximum of 25 stocks over time.
- Divide your capital (current + future) into 25 equal parts.
- The first month, buy the 10 (or less if you desire) positions based on the 10 top stocks for that month.
- From the next month onwards, check for the new stocks appearing in the top 10 list that are not part of your portfolio, and add (as many as your process and budget allow).
- Repeat step 4 until you reach the max 20 or 25 positions.
- When you have reached the max 20 or 25 positions, and you have no more capital to add, look for new stocks that have made it to the top 10 list and see if anyone of them should be added based on your further research. If you decide to add a position, then you need to find a position that you would like to drop and replace with the new one. You can find an existing position to drop that has not made it to the top 10 during the last several months (for example, during the last six months).
- It may also be recommended to monitor your positions periodically, preferably monthly. Also, make sure that you do not overweight any particular sector or industry segment.
We will draw upon our original current month’s data set, taken from our other DGI series (5 Relatively Safe and Cheap DGI). We will then apply additional criteria to filter out stocks that have provided a high rate of dividend growth in the recent past and are likely to continue on that path for the foreseeable future.
To get a complete spreadsheet of this dataset, please see our original article. For the sake of clarity, we will list the original filtering criteria below:
- Market cap > $10 billion ($9 billion in a down market)
- Dividend yield > 1.0% (some exceptions are made to include high quality but lower yielding companies)
- Daily average volume > 100,000
- Dividend growth past five years >= 0.
- Preferably, a minimum of 5 years of positive dividend growth.
Subsequent to the above filter, we calculated a score (Dividend Safety Quality Score) that was derived based on the following factors:
- Current Yield
- Dividend growth history (number of years of dividend growth):
- Payout ratio – Preferably based on Free Cash Flow.
- Past five-year and 10-year dividend growth
- EPS growth (average of previous five years of growth and expected next 3-5 years’ growth)
- Chowder number – the sum of the 5-yr dividend growth rate and the current yield
- Debt/equity and Debt/asset ratios
- S&P’s credit ratings (Standard & Poor’s Global Ratings)
- Distance from 52-week high (current price minus 52-wk high price)
- Sales or Revenue growth for the past five years.
1. The original Quality Score was calculated and taken from the spreadsheet, as attached in our most recent monthly article (5 Relatively Safe and Cheap DGI Stocks). The link was provided above in the introductory section.
2. All tables in this article are created by the author unless explicitly specified. The stock data have been sourced from various sources such as Seeking Alpha, Yahoo Finance, GuruFocus, IBD, and CCC-List (dripinvesting).
Additional Criteria for Dividend Growth Stocks:
A vast majority of stocks selected so far have raised their dividend payouts for five years or more. Some of them may not have raised during the last five years consistently but have paid dividends for a long duration and raised them only periodically. However, as an additional criterion, now we will filter out stocks that have increased their dividend payouts by an average annual rate of 8% or more. We will also consider stocks that may not have provided a consistent yearly increase but overall have provided a cumulative increase of 30% in payouts in the last five years.
We will now use the following additional criteria to filter out stocks that would fit the mold of High Growth DGI stocks.
- The payment Ratio (on a cash-flow basis or EPS basis) is less than 80%
- 5-Year Dividend growth is at least 8% or greater. This is in line with the growth rate of the benchmark fund, Vanguard Dividend Appreciation ETF (VIG).
- Chowder number (5-YR Dividend-growth plus the Dividend-yield) >= 10. The Chowder number is the sum of the current yield and the dividend growth rate of the last five years.
After we apply these criteria, we are left with 224 stocks on our list. Please note that at this stage, we have applied our base criteria that are loose enough to keep a wide variety of stocks. However, we will now perform additional filtering to get to the best possible candidates.
We know that for a stock to grow its dividend rapidly, it must grow its earnings at a very high pace as well. Without growth in earnings (earnings per share – EPS), the company cannot grow its dividends for long. Sure, some companies may try to do it by taking on more debt or cutting costs, or spending less on R&D and capital spending, but such measures cannot be sustained very long before they start causing wider issues. So, our focus ought to be on earnings growth.
In our spreadsheet, we will add four more columns of data for each of the stocks:
- EPS (earnings per share) Rating
- Last Qtr EPS change % (actual)
- Current Qtr EPS change % (est.)
- Current year EPS change % (est.).
We will now assign weights to these four sets of data for each stock and add them to the original “Dividend Safety Quality Score” to come up with a modified Quality Score tilted in favor of high dividend growth stocks. We will call this column a High-Growth Quality-Score [HGQS]. We will also import the 5-Yr Average Dividend Yield for each stock.
Narrowing Down The List To 40 Stocks
From the above list of 224 stocks, we will select 40 stocks based on the following methodology.
- Top 10 stocks based on the highest HG-Quality-Score
- Top 10 stocks based on the highest 5-yr Dividend Growth
- Top 10 stocks based on the excess yield over and above 5-YR Average Dividend Yield.
- Top 10 stocks based on current discount from 52-week highs.
We will now remove the duplicates from this list as many stocks qualify based on multiple criteria.
Appeared two times: CI, GOLD, LEN, NRG, PXD, RJF, SIRI, TGT (8 duplicates)
Appeared three times: AAP (2 duplicates)
We are now left with 30 (40-10) names.
Next, we will remove any stock that has an HG-Quality Score of less than 60. This check will remove two entries (BAX, BALL) from the list, leaving us 28 names.
We will also remove any names where the revenue growth (over the past five years) has been negative. There is none on this list.
Finally, we will also remove some stocks to avoid any over-concentration from one sector or any one industry segment.
Oil Production/Exploration: There are three stocks, MPC, PXD, and FANG. We remove FANG. Also, even though our filtering process selected PXD, we prefer CTRA over PXD due to its longer dividend history and consistency.
Basic Materials (Gold): NGLO, AEM, GOLD. We keep GOLD for dividend consistency and remove NGLO and AEM.
Business Services: ADP, V, and RHI. We will keep ADP and V but remove RHI.
Financial and Regional Banks: RF, RJF, and ALLY. We will remove all of them for the time being because of uncertainties going around the bank stress.
REITs (Housing): INVH, AMH. We keep INVH (for a slightly higher rating and better dividend consistency) and remove AMH.
Retail: LOW, TGT. We keep LOW (higher rating) and remove TGT.
We are finally left with 19 names, which are presented in the table below:
Table 1: Top 19 High Growth DGI Stocks of the month:
Final Step: Selection Of Top 10 High Growth DGI Stocks
This final step of bringing down the number of selections to just ten stocks is a bit subjective. We try to keep the group as diverse as possible, representing many sectors and industry segments. The readers could certainly come up with their own set of ten companies appropriate for their goals, but they should try to keep the group diversified among different sectors or industry segments. Nonetheless, we describe below how we go about selecting these ten stocks for the month.
- As a first step, we will sort out our list of the above 19 stocks on the basis of sector-Industry-segment and then in descending order of net Quality-score.
- From top to bottom, we will select one stock from each industry segment. We will try to select either the top (or the second one) from each of the industry segments.
- We may give some weightage to how a stock is priced currently (in terms of valuation), but some of these high-growth stocks may not trade at cheap valuations.
Here are our top 10 selections this month.
Current (March) List: (DE), (LOW), (UNH), (MPC), (ADP), (V), (CTRA), (LEN), (INVH), (TSN).
February List: (CTRA), (CSL), (NTR), (LOW), (DE), (RF), (MPWR), (CI), (AAP), (INVH).
List of stocks that are common in the current and previous month lists: DE, LOW, CTRA, INVH.
Since this methodology is based largely on a filtering process, we would like to mention that many stocks could repeat from one month to the next, but we will also see new stocks making it to the top and replacing some old ones.
Note: Please note that if a stock was in a previous month’s list but is no longer selected in the current list, it does not mean the stock is no longer a good choice. If the stock has still scored an HG-Quality score of >70, we think it could still be at least a ‘hold’ (if not a ‘buy’). The purpose here is to simply highlight the top candidates every month. Please perform further research and your due diligence before making any buy or sell decisions.
Note: In the case of CTRA, the actual dividend in the year 2022 was $2.49 per share, which at the current price, yields roughly 10%. However, in the table above, we are showing a much lower yield since we are excluding the special or variable dividend. Most public websites, including SeekingAlpha, show the same lower yield. Also, the company website describes the most recent $0.57 dividend as a $0.20 regular/base quarterly dividend and $0.37 as a variable dividend. It is highly likely that the company will keep paying the variable dividend in the future, but the amount is not fixed. Please use your own judgment in this regard.
For backtested performance, we are assuming that our model portfolio was invested equally in the ten selected stocks for the entire period. Please keep in mind that this is backtested performance and not an actual one. Also, past performance is no guarantee of any kind for the future. Also, please note that one of the stocks, INVH, did not have sufficient history, so it could not be included prior to 2018.
Performance of the Previous Month’s selections:
(From Feb.13, 2022, to Mar. 14, 2023.)
The performance comparison is for a period of approximately one month. Although one month is too short to judge the performance of any portfolio; however, it may be worthwhile to compare the performance every month, and that will allow us to calculate the yearly performance of the strategy.
This past month, the performance of the last month’s portfolio was subpar to S&P500 and our benchmark ETF VIG. Obviously, the performance will vary from month to month. We have also added a couple of columns to show the accumulative performance since the beginning of the year.
In this article, our primary focus is on selecting high-growth dividend stocks. High dividend growth stocks are likely to offer a high rate of dividend growth for the next 3-5 years (if not more) but usually do not offer high current yields because of their higher valuations. So, this list may not be appropriate for everyone, but rather for a more selective audience.
Based on our rule-based filtering process, we narrowed down the list to roughly 20 stocks. As a final step, we subjectively select ten stocks that form a diversified group and will likely offer high growth at reasonable values.
The top 10 list yields 2.1%, which is slightly higher than our benchmark Vanguard fund, VIG. However, the 5-yr dividend growth for this group is much higher at nearly 22% compared to 9% for VIG. The larger group of 19 stocks yields a bit higher at 2.2%. Both groups are highly diversified into many diverse sectors and industry segments.