7 High-Quality Dividend Growth Stocks Trading At Or Below Fair Value

This article presents 7 high-quality and discounted dividend growth [DG] stocks with a high likelihood of delivering annualized returns of at least 8%.

For each stock, I present key metrics, quality indicators, a fair value estimate, and the so-called Chowder number.

In my view, the stocks are good candidates for further research and possible investment.

Quality

To assess the quality of stocks, I use a quality scoring system developed by David Van Knapp that employs five widely used, independent quality indicators.

I've used a slightly modified version to rank the Dividend Aristocrats, an elite group of S&P 500 stocks that have increased their dividend payouts for 25 consecutive years or more.

Points   Value Line    Safety Rank   Value Line   Financial Strength   Morningstar   Economic Moat   S&P    Credit Rating   Simply Safe Dividends   Dividend Safety Score      Quality Score   Note  5 1 A++ Wide AAA AA+ • AA • AA– 81-100 (Very Safe) 25 Stocks with Perfect Scores 4 2 A+ Narrow A+ • A • A– 61-80 (Safe) 20-24 Highest Quality Stocks 3 3 A –  BBB+ • BBB • BBB– No debt* 41-60 (Borderline Safe) 15-10 High-Quality Stocks 2 4 B++ • B+ – Debt < 5%* 21-40 (Unsafe) 10-14  Medium-Quality  Stocks 1 – B – Debt < 10%* – 5-9 Low-Quality Stocks 0 5 < B None < BBB levels 0-20 (Very Unsafe) 0-4 Lowest Quality Stocks

A modified version of David Van Knapp's quality scoring system

My modifications include assigning points to companies that don't have an S&P Credit Rating but carry no or little debt. My color coding scheme is similar to the one used in the original article, though I differentiate perfect scores.

Valuation

To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox.io. Additionally, I estimate fair value using the 5-year average dividend yield of each stock using data from Simply Safe Dividends. 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.

Key Metrics

In addition to quality indicators and quality scores, I provide columns with key metrics of interest to DG investors, including years of consecutive dividend increases [Yrs], the dividend Yield for a recent stock Price, and the 5-year compound annual dividend growth rate [5-Yr DGR]. I also provide the so-called Chowder number [CDN], obtained by summing the Yield and the 5-Yr DGR. The Chowder Rule favors DG stocks likely to produce annualized returns of 8%. Finally, I provide my fair value estimate [Fair Val.] and the current discount [Disc.].

The Stocks

The following table presents DG stocks that have quality scores of at least 24 points, dividend yields of at least 2%, and fair value estimates at or below their current market prices:

#	Ticker	Company	Yrs	VL Safety Rank	VL Fin.  Stren.	M* Econ. Moat	S&P Credit Rating	SSD Divi. Safety	Qual	Yield	5-Yr DGR	CDN	Price	Fair Val.	(Disc.) Prem.
1	GD	General Dynamics	28	1	A++	Wide	A+	97	24	2.22%	10.5%	13	179.03	204	(12%)
2	HD	Home Depot	10	1	A++	Wide	A	87	24	2.45%	22.1%	25	214.08	215	(0%)
3	CSCO	Cisco Systems	9	1	A++	Narrow	AA-	91	24	3.13%	13.6%	17	45.30	50	(9%)
4	UNP	Union Pacific	13	1	A++	Wide	A-	88	24	2.23%	14.1%	16	177.03	178	(1%)
5	LMT	Lockheed Martin	17	1	A++	Wide	A-	84	24	2.45%	11.4%	14	386.47	396	(2%)
6	PFE	Pfizer	9	1	A++	Wide	AA	75	24	3.87%	6.7%	11	38.33	41	(7%)
7	MMM	3M	61	1	A++	Wide	AA-	75	24	3.48%	11.0%	14	168.79	178	(5%)

I own all of these stocks in my DivGro portfolio.

The CDN column is color-coded to indicate the likelihood of delivering annualized returns of 8%.
Stocks colored green are likely to deliver annualized returns of 8%, while stocks colored yellow are less likely to deliver annualized returns of 8%.

Headquartered in Falls Church, Virginia, General Dynamics (GD) is an aerospace and defense company offering products and services in business aviation; land and expeditionary combat systems, armaments and munitions; shipbuilding and marine systems; and information systems and technologies. Formed in 1952, GD has grown steadily through the acquisition of many businesses.

Founded in 1978 and based in Atlanta, Georgia, Home Depot (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.

Cisco Systems (CSC) designs, manufactures, and sells Internet protocol-based products and services. The company also delivers integrated solutions to develop and connect networks around the world. CSCO serves businesses of various sizes, public institutions, governments, and communications service providers. The company was founded in 1984 and is headquartered in San Jose, California.

Omaha, Nebraska-based Union Pacific (UNP) operates the largest public railroad in North America, with 32,000 miles of track linking 23 states in the western two-thirds of the United States. UNP hauls coal, industrial products, intermodal containers, agricultural goods, chemicals, and automotive products. UNP owns a quarter of Mexican railroad Ferromex. The company was founded in 1862.

Founded in 1909 and headquartered in Bethesda, Maryland, Lockheed Martin (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.

Headquartered in New York and founded in 1849, Pfizer (PFE) is one of the world's largest pharmaceutical firms. The company discovers, develops and manufactures healthcare products. Prescription drugs and vaccines account for almost 90% of PFE's sales. Its brands include Prevnar 13, Xeljanz, Eliquis, Lipitor, Celebrex, Pristiq and Viagra.

3M (MMM)  is a diversified technology company with worldwide operations. The company has leading positions in consumer and office; display and graphics; electronics and telecommunications; health care; industrial; safety, security and protection services; transportation; and other businesses. MMM was founded in 1902 and is headquartered in St. Paul, Minnesota.

Concluding Remarks

This article presented seven DG stocks from the Highest Quality category of David Van Knapp's quality scoring system. The stocks yield at least 2% and trade at or below my fair value estimates.

I like the simplicity of the quality scoring system and I believe it does a great job identifying high-quality stocks. The quality scoring system is quite stringent, so stocks scoring 20-25 points would be considered high-quality stocks by many investors.

I encourage readers to do their own due diligence before investing in any of these stocks.

This article first appeared on The DIV-Net on Tuesday, 24 December 2019. Active bloggers with sites that focus on Dividend Investing, Value Investing or a long-term buy-and-hold philosophy are invited to apply for associate membership. 

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