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Dividend Growth Watchlist Criteria
The companies listed on this watchlist are stable with a track record of raising their dividends consistently. The company must also have a “Wide” economic moat, according to Morningstar. This ensures a company I consider for investment has a sustainable competitive advantage for the foreseeable future. An S&P Capital IQ Earnings and Dividend Ranking of A or A+ helps to establish the company has achieved and should continue to achieve lower price volatility when compared to the broader market.
Next, since this is a dividend growth watchlist, it would logically make sense to measure a company’s dividend growth. In this case, a company needs to have a 10-year dividend growth rate of 10% or greater to ensure growth in the dividend itself, in addition to being a quality company. The company should have room to grow their dividend too, so a payout ratio of 50% or less is used as the final filter.
I use the dividend yield theory to determine if a stock is potentially overvalued or undervalued. This idea suggests a company’s yield will revert to the norm over time. An example below is US Bancorp (USB) – the current yield is 3.21% while its five-year average is just 2.83%. The difference being 38 basis points or about 13%, which suggests it could be undervalued.
| Company | 10 Year DGR | Dividend Yield (2/28/22) | Div. Yield(5 Yr Avg.) | Overvalued/ Undervalued |
| Accenture PLC (ACN) | 14.61% | 1.20% | 1.46% | 18% |
| Applied Materials Inc (AMAT) | 11.49% | 0.71% | 1.22% | 42% |
| BlackRock Inc (BLK) | 11.63% | 2.60% | 2.29% | -14% |
| Comcast Corp (CMCSA) | 16.09% | 2.29% | 1.88% | -22% |
| Costco Wholesale Corp (COST) | 12.50% | 0.61% | 0.85% | 28% |
| Cintas Corp (CTAS) | 24.14% | 1.01% | 1.02% | 1% |
| Ecolab Inc (ECL) | 10.23% | 1.13% | 0.97% | -16% |
| Graco Inc (GGG) | 10.10% | 1.16% | 1.09% | -6% |
| Home Depot Inc (HD) | 20.30% | 2.40% | 2.07% | -16% |
| Jack Henry & Associates Inc (JKHY) | 16.10% | 1.11% | 1.06% | -5% |
| Lockheed Martin Corp (LMT) | 12.55% | 2.74% | 2.70% | -1% |
| Mastercard Inc (MA) | 40.16% | 0.53% | 0.50% | -6% |
| Northrop Grumman Corp (NOC) | 12.08% | 1.53% | 1.63% | 6% |
| Rollins Inc (ROL) | 15.15% | 1.24% | 0.98% | -27% |
| Roper Technologies Inc (ROP) | 17.01% | 0.55% | 0.52% | -6% |
| Thermo Fisher Scientific Inc (TMO) | 22.63% | 0.22% | 0.23% | 4% |
| T Rowe Price Group Inc (TROW) | 13.29% | 3.30% | 2.46% | -34% |
| US Bancorp (USB) | 13.15% | 3.21% | 2.83% | -13% |
| Visa Inc (V) | 23.91% | 0.68% | 0.59% | -15% |
Goal
The goal of my dividend growth watchlist is to discover companies to add to my dividend growth portfolio in an attempt to consistently exceed the market return of the Vanguard Dividend Appreciation ETF (VIG). Through February of this year, an equally weighted portfolio of these 19 stocks mentioned above would have underperformed VIG by just 0.45%. VIG lost 7.96% during the first two months of 2022, while the stocks above lost 8.41%.
| Symbol | February Returns | YTD Return through Feb. |
| ACN | -10.62% | -23.57% |
| AMAT | -2.70% | -14.56% |
| BLK | -9.60% | -18.75% |
| CMCSA | -6.46% | -6.63% |
| COST | 2.95% | -8.40% |
| CTAS | -3.89% | -15.09% |
| ECL | -6.96% | -24.86% |
| GGG | -0.65% | -10.33% |
| HD | -13.94% | -23.90% |
| JKHY | 5.36% | 5.87% |
| LMT | 12.20% | 22.84% |
| MA | -6.62% | 0.55% |
| NOC | 19.99% | 14.67% |
| ROL | 6.11% | -4.31% |
| ROP | 2.53% | -8.75% |
| TMO | -6.42% | -18.47% |
| TROW | -6.39% | -26.48% |
| USB | -2.84% | 0.66% |
| V | -4.28% | -0.11% |
| VIG | -2.80% | -7.96% |
Top 2 Stocks
The best-performing stock on the watchlist continues to be Lockheed Martin. In January the stock returned 9.5%, in February it returned another 12.20% giving it a year to date return of almost 23%. Lockheed boasts a strong 12.55% ten year dividend growth rate, while also maintaining a payout ratio below 50% leaving some room for future dividend growth.
Northrop Grumman Corp. is the second best performing stock on the watchlist through February at 14.67%. NOC actually had a negative month in January down 4.44% but rebounded nicely in February, nearly 20%. Similar to LMT it has a solid ten year dividend growth rate of 12.08%; however, NOC is in a significantly better position to continue its dividend growth given that its payout ratio is just 14.12%.
Final Thoughts
This dividend growth watchlist is used to identify companies worthy of further research. Stock prices fluctuate continuously, and although there are legitimate reasons for a price increase or decrease, occasionally there are times the market is just overreacting to a short-term issue. I believe if you can identify the reason(s) and determine for yourself if a decline in stock price is justified, you can minimize risk in your portfolio by purchasing a company’s stock when their yield is higher than average.
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