10 Dividend Growth Stocks For October 2022

After two months off, I’m back with another edition of my monthly series, 10 Dividend Growth Stocks. I rank a selection of Dividend Radar stocks in this series and present the ten top-ranked stocks for further research and possible investment. Dividend Radar is a weekly automatically generated spreadsheet of dividend growth [DG] stocks with dividend increase streaks of five or more years.

I usually rank stocks with DVK Quality Snapshots, an elegant quality scoring system presented by David Van Knapp in this article. The system employs five widely used quality indicators from independent sources and assigns 0-5 points to each quality indicator for a maximum of 25 points.

I like the simplicity of DVK Quality Snapshots, but there’s an outsized impact on the quality score for stocks not covered by Value Line. Value Line contributes two of the five quality indicators or up to 10 of 25 available points. A stock not covered by Value Line immediately forfeits 10 points and can only score a maximum of 15 points!

Making matters worse is that the Value Line Safety Rank is actually an average of two other Value Line metrics, the Value Line Financial Strength rating (the second Value Line quality indicator used in DVK Quality Snapshots) and Value Line’s Price Stability Index.

In the next few months, I’ll experiment with other quality indicators to see if I can find a suitable replacement for Value Line’s Safety Rank. This month, I’m substituting Value Line’s Safety Rank with a ranking based on JUST Capital‘s 2022 Rankings of America’s largest publicly traded companies to see how quality scoring might be affected.

About JUST Capital

JUST Capital was founded in 2013 with the long-term goal of helping to bring about a more just and balanced economy that serves the broader best interests of society. JUST Capital is an independent non-profit 501(c)(3) organization funded by donations, grants, and earnings from various products and partnerships.

JUST Capital’s mission is “to build an economy that works for all Americans by helping companies improve how they serve all their stakeholders – workers, customers, communities, the environment, and shareholders.”

Every year, the organization surveys Americans to identify the issues that matter most in defining just business behavior. It then establishes representative metrics and measures the largest publicly traded U.S. companies annually, arriving at an overall ranking for each company.

In the 2021 survey, the public identified 20 issues essential to just businesses, classified below according to the stakeholders they impact most:

To produce the 2021 Rankings, JUST Capital tracked, analyzed, and ranked 954 companies in 2021 across five stakeholder groups, 20 issues, 66 metrics, and 241 data points.

In addition to producing its annual rankings, JUST Capital engages with companies on ways to improve their business practices and drive capital toward more just businesses through its JUST Alpha research, investable indexes, the JUST ETF, and by licensing data.

Finally, JUST companies exhibit higher returns and lower risk, and Leadership and Ethics, and Worker Treatment, are significant drivers of Alpha.

Screening and Ranking

The latest Dividend Radar (dated October 7, 2022) contains 722 stocks. Of these, only 363 (or about 50%) have JUST Capital rankings. Furthermore, only 16 stocks have quality scores of at least 24 points, whereas 48 stocks have quality scores of at least 24 points when using DVK Quality Snapshots.

Here’s how I assigned points based on JUST Capital’s Overall Rankings:

The latest Dividend Radar (dated October 7, 2022) contains 722 stocks. Of these, only 363 (or about 50%) have JUST Capital rankings. Furthermore, only 16 stocks have quality scores of at least 24 points, whereas 48 stocks have quality scores of at least 24 points when using DVK Quality Snapshots.

I ranked the sixteen candidates with quality scores of at least 24 points and present the 10 top-ranked stocks for consideration. To break ties, I used JUST Capital’s Overall Rankings instead of my usual tie-breakers.

Each stock’s Rank is shown in the tables below.

The 10 Dividend Growth Stocks for October

Here are this month’s ten top-ranked DG stocks in rank order:

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I own all of these stocks in my DivGro portfolio. The following company descriptions are my summary of company descriptions sourced from Finviz.

1. Microsoft (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.

2. Cisco Systems (CSCO)

CSCO designs, manufactures, and sells Internet protocol-based products and services. The company also delivers integrated solutions to develop and connect networks worldwide. 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.

3. Accenture plc (ACN)

Founded in 1989 and 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 Services; Products; and Resources.

4. Visa (V)

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

5. 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.

6. Procter & Gamble (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.

7. Apple (AAPL)

Headquartered in Cupertino, California, AAPL designs, manufactures, and markets smartphones, personal computers, tablets, wearables, and accessories worldwide. The company also sells related software, services, peripherals, networking solutions, and third-party digital content and applications. AAPL was founded in 1977.

8. PepsiCo (PEP)

PEP is a global beverage and food company. The company distributes beverages under well-known brands such as Pepsi, Gatorade, Mountain Dew, 7UP, and Tropicana and food and snacks under brands such as Quaker, Lay’s, Doritos, Cheetos, and Ruffles. PEP was founded in 1898 and is headquartered in Purchase, New York.

9. Mastercard (MA)

MA, a technology company, provides transaction processing and other payment-related products and services in the United States and internationally. The company offers payment solutions and services under the MasterCard, Maestro, and Cirrus brands. MA was founded in 1966 and is headquartered in Purchase, New York.

10. Merck (MRK)

Founded in 1891 and headquartered in Kenilworth, New Jersey, MRK is a global healthcare 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.

Please note that the top ten DG stocks are candidates for further analysis, not recommendations.

Key Metrics and Fair Value Estimates

Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates:

• Yrs: years of consecutive dividend increases

• Adj Qual: DVK Quality Snapshots quality score, with JUST Capital’s 2021 Rankings substituted for Value Line’s Safety Rank.

• 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#: Chowder Number, a popular metric for screening dividend growth stocks

• 5-TTR: 5-year compound trailing total returns

• JC 2021 Rank: JUST Capital’s 2021 Rankings

• VL Fin Stren: Value Line’s Financial Strength ratings

• MS Econ Moat: Morningstar’s Economic Moat

• S&P Cred Rating: S&P Global’s Credit Ratings

• SSD Divi Safety: Simply Safe Dividends’ Dividend Safety Scores

• Buy Below: my risk-adjusted buy-below price (see below)

• -Disc +Prem: discount or premium of the recent share Price to my Buy Below price

• Price: recent share price

Color-coding Ticker: highlighted for stocks I own in my DivGro portfolio Adj Qual: for color scheme, see DVK Quality Snapshots Fwd Yield: green if Fwd Yield ≥ 5-Avg Yield 5-YOC: green if 5-YOC ≥ 4.0%, yellow if 5-YOC ≥ 2.5% (but less than 4.0%), and red if 5-YOC < 2.5% C#: colored based on the likelihood of delivering annualized returns of 8%, according to the Chowder Rule: green means likely, yellow means less likely, and red means unlikely Price: green if Price ≤ Buy Below

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I use a survey approach to estimate fair value [FV], collecting fair value estimates and price targets from several online sources such as Morningstar, Finbox, and Portfolio Insight. Additionally, I estimate fair value using each stock’s five-year average dividend yield. With up to 11 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 FV estimate.

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

My Buy Below prices recognize that the highest-quality stocks rarely trade at discounted valuations. As a dividend growth investor with a long-term investment horizon, I’m more interested in owning quality stocks than getting a bargain on lower-quality stocks.

Commentary

Here’s a comparative analysis of an equal-weighted portfolio of this month’s top ten DG stocks, courtesy of Finbox.com:

From a price-performance perspective, the portfolio would have outperformed the S&P 500 (as represented by the SPDR S&P 500 Trust ETF (SPY)) over the last five years, returning 84% versus SPY’s 41%.

According to Finbox.com, all the stocks have fair value upsides, with CSCO (+39%), MSFT (+27%), and PG (+27%) having the highest upsides of the ten top-ranked DG stocks for October.

V (17.9%) and MA (17.8%) have the highest 5-year dividend growth rates and are strong candidates for growth-oriented investors.

AAPL, MSFT, MA, and ACN have the highest 5-year TTRs:

All but two stocks (CSCO, JNJ) outperformed SPY over the 5-year period.

CSCO (3.77%) and MRK (3.15%) offer the highest forward yields and are strong candidates for income investors.

As for valuations, CSCO (-28%), V (-25%), and MA (-21%) are discounted most relative to my Buy Below prices and are strong candidates for value investors.

In November 2021, I reworked my system for determining target weights for DivGro. The system is dynamic and flexible, allowing me to calibrate factors when my goals change. Following is a chart showing the current and target weights of dividend-paying stocks in DivGro:

Of this month’s candidate stocks, my AAPL and MSFT positions are significantly overweight. In contrast, my ACN and PEP positions are significantly underweight. According to my calculations, I’d need to buy 53 shares of ACN and 38 shares of PEP to turn them into full positions (matching my target weights).

If I had to choose between ACN and PEP, I’d likely invest in ACN first.

With a Non-GAAP payout ratio of 41%, ACN has plenty of room to continue paying and raising its dividend. ACN’s dividend is Very Safe, given its Dividend Safety Score of 92, according to Simply Safe Dividends.

Concluding Remarks

In this article, I ranked 16 Dividend Radar stocks using a variation of DVK Quality Snapshots in which I substituted JUST Capitals’s 2021 Rankings for Value Line’s Safety Rank.

Below is a comparison of the impact of substituting JUST Capital’s 2021 Rankings for Value Line’s Safety Rank:

NIKE (NKE), Automatic Data Processing (ADP), and Walmart (WMT) disappeared from the list and were replaced by PEP, MA, and MRK.

While using JUST Capital’s 2021 Rankings provide an interesting perspective, I’m not ready to commit to that change permanently.

JUST Capital provides rankings for only 50% of Dividend Radar stocks, which is insufficient coverage, in my view. In contrast, Value Line covers 90% of Dividend Radar stocks, while Morningstar, S&P Capital, and Simply Safe Dividends cover 97%, 90%, and 67%, respectively.

I have several requirements for a replacement quality indicator:

1. Independent source:
   • objective ratings from sources that systematically compile and provide information
2. Synthesis of multiple data:
   • compiled or amalgamated from several data points
3. Sufficient coverage:
   • coverage of the majority of Dividend Radar stocks (at least 67%)
4. Bulk download:
   • to facilitate regular updates, I need some way to quickly download scores
5. Somewhat orthogonal:
   • represents an aspect of quality not already covered by other indicators

JUST Capital falls short on requirements 3 and 4.

In time, I’d like to replace VL’s Safety Rank with a suitable quality indicator from a new independent source. The replacement indicator should represent an aspect of quality not already covered by the other indicators. Additionally, I’d prefer to use an indicator (rank, rating, grade, or score) compiled or synthesized from several underlying data points and one that covers most DG stocks. To facilitate regular updates, I’d prefer a bulk download capability.

If you have any suggestions about a possible replacement quality indicator, please let me know in the comments below!

As always, I encourage readers to do their due diligence before buying any stocks I cover.

Thanks for reading, and take care, everybody!