Galeanu Mihai
Quality Stocks
Any hope of salvaging this year’s return quickly faded in early December as volatility returned to the market. My watchlist, Vanguard Dividend Appreciation ETF (VIG) and SPDR S&P 500 Trust ETF (SPY) all finished 2022 with a negative total return. My watchlist for December lost 5.21% last month, VIG performed better posting a loss of only 3.73% and SPY finished the worst with a loss of 5.76%.
Annualized alpha over VIG shrunk from 3.96% to 2.99%, and annualized alpha over SPY also shrunk from 6.25% to 6.13%. Following the poor result in December the watchlist once again sees its long-term annualized return fall below 12% (11.80%).
The main focus of this watchlist is to find the best combination of quality companies trading for attractive prices. I believe this is the optimal long-term strategy to building wealth.
The top 15 dividend growth stocks for January offer an average dividend yield of 1.74%. Collectively, they have increased dividend payments at a rate of 29.80% during the last 5 years. Based on dividend yield theory, these 15 stocks are about 33% undervalued right now, and I think they are poised to offer strong long-term returns.
I would recommend two approaches to dividend investing. The first is to dollar-cost average into at least 10-20 or more quality dividend-paying stocks across multiple sectors and industries. By dollar-cost averaging, you eliminate the risk of trying to value a stock and over a long enough period, theoretically, you will buy shares at market highs, lows, and in-between resulting in an average cost basis somewhere in the middle. The second method carries a little more risk. Invest in undervalued stocks, also dollar-cost averaging into at least 10-20 unique quality companies across multiple sectors and industries. The additional risk with this approach comes from the chance that your valuation method proves to be incorrect. However, by investing in multiple unique stocks, the odds that you accurately identify at least a few undervalued stocks increases. The resulting upside from a few correct picks may more than offset the underperformance from the bad ones.
Watchlist Criteria
The criteria used to determine which stocks are included in my high-growth dividend stock watchlist remains unchanged for January 2023. It is made up of the 8 factors listed below that have historically outperformed the broad universe of dividend-paying stocks when analyzed collectively.
- Market Cap of at least $10 billion
- Payout Ratio no greater than 70%
- 5-year Dividend Growth rate of at least 5%
- 5-year Revenue Growth rate of at least 2%
- 5-year EPS Growth rate of at least 2%
- S&P Earnings and Dividend Rating of B+ or better
- Wide or Narrow Moat (Morningstar)
- Exemplary or Standard Management Team (Morningstar).
The rules identified 121 stocks for the month of January that were all ranked based on the above-mentioned metrics with the exclusion of market cap. I then computed the current valuation for each stock using dividend yield theory. All stocks were ranked for both quality and valuation and sorted by the best combination of both. Next, I computed a forecasted rate of return for the next 5-year period for each of the stocks. This return is based on forecasted earnings growth, a return to fair value and the dividend yield.
The highest ranked 15 stocks with a forecasted return greater than or equal to 12% were chosen for the watchlist. The long-term hypothesis for this watchlist is that it will outperform a broad quality dividend fund such as Vanguard’s Dividend Appreciation ETF, VIG.
Watchlist For January 2023
Created by Author
Above are the 15 stocks I am considering for further evaluation during the month. They are sorted in descending order by their rank and 5-year dividend growth rate.
The “O/U” column represents potential undervalue; this is a comparison of the current dividend yield to the historical dividend yield as a function of share price.
The expected return in the table above was computed using a discounted 5-year EPS forecast, a return to fair value and the current dividend yield. There is also a margin of safety built into the forecasted return. These figures are just assumptions based on the available data and there is no guarantee these returns will be attained.
The large potential under-valuations for Cigna (CI) are overstated due to very fast recent dividend growth by the company. Dividend yield theory works best for companies with stable and consistent dividend growth.
There is only 1 change to the top 15 list from the prior month. Home Depot (HD) has fallen further down the list and is replaced by Mastercard (MA), which has climbed up.
Past Performance
The watchlist fell 5.21% in December and ends the year with a loss of 8.58%. Even though VIG performed better last month (-3.73%) it finishes 2022 with a loss of 9.80%, trailing the watchlist. SPY performed the worst in December, losing 5.76%, and closes out 2022 with a loss of 18.16%. The long-term annualized rate of return for the watchlist falls from 14.97% last month to 11.80% after December. My target rate of return is 12%, and despite the volatility in the market this year I remain optimistic that this watchlist will exceed this goal in the long run.
|
Month |
Watchlist |
All |
VIG |
SPY |
|
1 Month |
-5.21% |
-5.56% |
-3.73% |
-5.76% |
|
3 Month |
13.89% |
11.86% |
13.00% |
7.57% |
|
6 Month |
8.10% |
5.84% |
6.99% |
2.27% |
|
1 Year |
-8.58% |
-15.12% |
-9.80% |
-18.16% |
|
2020 |
6.27% |
6.15% |
9.09% |
7.94% |
|
2021 |
33.53% |
31.55% |
23.75% |
28.76% |
|
2022 |
-8.58% |
-15.12% |
-9.80% |
-18.16% |
|
Since Inception |
29.73% |
18.54% |
21.78% |
13.74% |
|
Annualized |
11.80% |
7.56% |
8.81% |
5.67% |
Top 5 past and present watchlist stocks in December 2022:
- MarketAxess (MKTX) +4.09%
- Activision Blizzard (ATVI) +3.52%
- Northrup Grumman (NOC) +2.31%
- Cigna (CI) +1.09%
- Charles Schwab (SCHW) +0.87%.
Cigna was the only stock from the December watchlist to appear in the top 5 performers list for last month. In total there have been 66 unique dividend stocks selected by this watchlist since September of 2020.
Top 5 Stocks by Total Return since joining the watchlist:
- Automatic Data Processing (ADP) +80.47% (28 months)
- UnitedHealth Group (UNH) +63.26% (23 months)
- Tractor Supply (TSCO) +63.39% (23 months)
- Charles Schwab (SCHW) +65.04% (23 months)
- Northrop Grumman (NOC) +64.55% (28 months).
ADP remains the best watchlist stock albeit the company posted a loss of 9.14% in December. Positions 2-5 remains very tight and get a small shuffle compared to the prior month. SCHW jumps from 4th to 2nd, NOC jumps from 5th to 3rd, TSCO falls from 3rd to 4th and UNH drops from 2nd to 5th.
Since not all stocks have been on the watchlist for the full 28 months of its existence, comparing a monthly average return can help normalize the results. Here are the top 5 stocks with the highest average monthly return since joining the watchlist.
- Best Buy (BBY) +3.90% (6 months)
- Cigna (CI) +3.54% (10 months)
- Charles Schwab (SCHW) +2.20% (23 months)
- Tractor Supply (TSCO) +2.16% (23 months)
- UnitedHealth Group (UNH) +2.15% (23 months).
Drivers Of Alpha
The watchlist trailed VIG in December. 4 watchlist stocks outpaced the ETF last month.
- (CI) +1.09%
- (TSCO) -0.59%
- (HD) -2.51%
- (SSNC) -3.16%.
The remaining 11 stocks underperformed VIG.
- (FMC) -4.03%
- (V) -4.26%
- (SWKS) -4.70%
- (BBY) -4.96%
- (CDW) -5.33%
- (LOW) -6.26%
- (MPWR) -7.23%
- (MSCI) -8.40%
- (TXN) -8.45%
- (BALL) -8.81%
- (DPZ) -10.62%.
Buy-And-Hold Portfolios
The best way to utilize the ideas presented by this watchlist is with a long term buy-and-hold investing approach. I started tracking how such a portfolio would have worked out with one portfolio started at the beginning of 2021 and the other at the beginning of 2022. Each portfolio assumes you invest equally amongst the chosen 15 stocks for the given month and never liquidate these positions.
The 2021 B&H portfolio performed decent in December, posting a loss of 4.46%, outperforming SPY but losing slightly to VIG. The cumulative return since January 2021 for the portfolio is 16.63% compared to 11.63% for VIG and 5.37% for SPY. On an annualized basis the portfolio has a return of 8.00% compared to 5.65% for VIG and 2.65% for SPY. The portfolio holds 54 unique positions, here are the individual returns and allocation as of December 31, 2022.
|
Symbol |
RETURN |
ALLOCATION |
|
AAP |
-17.21% |
0.90% |
|
ACN |
4.83% |
0.28% |
|
AMAT |
-26.21% |
0.60% |
|
APH |
-1.00% |
1.34% |
|
ATVI |
11.27% |
1.21% |
|
BK |
12.75% |
0.31% |
|
BALL |
-23.33% |
2.29% |
|
BBY |
14.99% |
1.87% |
|
BLK |
-6.61% |
0.51% |
|
BX |
-26.61% |
0.20% |
|
CDW |
7.18% |
2.04% |
|
CI |
23.17% |
3.34% |
|
CMCSA |
-30.28% |
0.19% |
|
CTAS |
27.20% |
2.76% |
|
DE |
26.03% |
0.34% |
|
DPZ |
-9.68% |
4.41% |
|
FDS |
22.77% |
0.33% |
|
FDX |
-20.49% |
0.22% |
|
FMC |
10.15% |
2.09% |
|
GS |
3.76% |
1.13% |
|
HD |
7.69% |
5.56% |
|
HUM |
22.11% |
3.98% |
|
ICE |
-1.18% |
2.15% |
|
INTU |
3.65% |
0.28% |
|
JKHY |
13.26% |
0.62% |
|
JPM |
-12.61% |
0.24% |
|
LMT |
45.37% |
0.79% |
|
LOW |
2.00% |
5.82% |
|
LRCX |
-17.05% |
1.58% |
|
MA |
3.32% |
4.21% |
|
MKTX |
-40.82% |
0.96% |
|
MPWR |
-17.02% |
1.35% |
|
MS |
-2.51% |
2.65% |
|
MSCI |
-11.75% |
2.16% |
|
NOC |
75.01% |
2.85% |
|
NTRS |
-4.67% |
1.04% |
|
NVDA |
-44.28% |
0.61% |
|
PGR |
53.07% |
0.83% |
|
ROL |
19.89% |
0.33% |
|
ROP |
6.72% |
1.45% |
|
SBUX |
12.88% |
1.53% |
|
SCHW |
18.48% |
5.47% |
|
SHW |
-2.33% |
1.06% |
|
SIRI |
-6.24% |
0.51% |
|
SSNC |
-17.63% |
3.58% |
|
SWKS |
-18.13% |
1.33% |
|
TMO |
13.09% |
1.54% |
|
TROW |
-23.73% |
2.49% |
|
TSCO |
20.53% |
5.89% |
|
TXN |
-5.41% |
3.08% |
|
UNH |
37.56% |
4.11% |
|
USB |
0.53% |
0.27% |
|
V |
1.69% |
2.76% |
|
WST |
-46.48% |
0.58% |
The 2022 B&H portfolio performed slightly worse in December, posting a loss of 5.00%. The year-to-date return for the portfolio is -11.97% compared to -9.80% for VIG and -18.16% for SPY. There are a total of 38 unique positions in the portfolio due to a high turnover rate on the watchlist because of all the market volatility. The majority of the turnover took place during the first 6 months of the year, no new stocks were added to this portfolio during the last 5 months.
Here are the individual returns and allocation as of December 31, 2022.
|
Symbol |
RETURN |
ALLOCATION |
|
AAP |
-17.21% |
1.84% |
|
APH |
-1.39% |
2.19% |
|
ATVI |
15.73% |
0.64% |
|
BALL |
-23.33% |
4.68% |
|
BBY |
14.99% |
3.83% |
|
BLK |
-6.61% |
1.04% |
|
BX |
-26.61% |
0.41% |
|
CDW |
1.95% |
3.39% |
|
CI |
23.17% |
6.84% |
|
CTAS |
16.55% |
0.65% |
|
DPZ |
-4.04% |
4.79% |
|
FDX |
-20.49% |
0.44% |
|
FMC |
10.15% |
4.28% |
|
GS |
6.70% |
1.78% |
|
HD |
5.73% |
5.87% |
|
HUM |
18.50% |
1.32% |
|
ICE |
10.50% |
1.84% |
|
JPM |
-12.61% |
0.49% |
|
LOW |
-0.74% |
5.51% |
|
LRCX |
-2.75% |
1.62% |
|
MA |
4.26% |
4.05% |
|
MPWR |
-8.62% |
2.03% |
|
MS |
5.70% |
2.93% |
|
MSCI |
-5.31% |
3.15% |
|
NTRS |
-21.88% |
0.43% |
|
NVDA |
-50.14% |
0.28% |
|
ROL |
19.89% |
0.67% |
|
SBUX |
12.88% |
3.13% |
|
SCHW |
10.48% |
3.68% |
|
SHW |
-6.72% |
1.04% |
|
SIRI |
-6.24% |
1.04% |
|
SSNC |
-10.20% |
4.49% |
|
SWKS |
-18.13% |
2.73% |
|
TROW |
-2.02% |
2.72% |
|
TSCO |
11.85% |
6.83% |
|
TXN |
-3.85% |
3.20% |
|
V |
0.51% |
3.90% |
|
WST |
-49.70% |
0.28% |
My expectations are for this watchlist to produce a long term 12% annualized rate of return. I use this watchlist along with my high yield watchlist to identify investing opportunities that I act on in my personal portfolio.
Total Return For All Watchlist Stocks
Here are the total returns for all past and present watchlist stocks since first appearing on the watchlist. Out of the 66 stocks that are on this list, 42 (49 last month) have positive total returns and 24 have negative total returns, the average return is 9.94% (16.20% last month). The watchlist has been around for 28 months, the average duration for all 66 stocks is just below 22 months.
|
Symbol |
Since Joining |
Count |
|
ADP |
80.47% |
28 |
|
SCHW |
65.04% |
23 |
|
NOC |
64.55% |
28 |
|
TSCO |
63.39% |
23 |
|
UNH |
63.26% |
23 |
|
PGR |
51.98% |
23 |
|
CTAS |
44.74% |
23 |
|
CI |
41.64% |
10 |
|
LMT |
38.96% |
28 |
|
CDW |
38.57% |
23 |
|
BK |
37.50% |
28 |
|
HUM |
36.72% |
22 |
|
TJX |
28.44% |
23 |
|
MSCI |
26.94% |
28 |
|
DE |
26.03% |
13 |
|
BBY |
25.84% |
6 |
|
COST |
24.47% |
28 |
|
APH |
24.39% |
23 |
|
DG |
23.62% |
21 |
|
KLAC |
22.18% |
20 |
|
USB |
21.34% |
26 |
|
TMO |
21.11% |
21 |
|
BLK |
20.27% |
28 |
|
ROL |
19.89% |
11 |
|
LOW |
19.78% |
28 |
|
GGG |
18.94% |
28 |
|
EXPD |
18.60% |
23 |
|
HD |
17.21% |
28 |
|
FDS |
16.78% |
28 |
|
NTRS |
15.94% |
28 |
|
ACN |
14.58% |
28 |
|
INTU |
14.21% |
28 |
|
NVDA |
9.91% |
21 |
|
JPM |
9.45% |
23 |
|
JKHY |
9.08% |
28 |
|
MSFT |
8.53% |
28 |
|
SHW |
4.70% |
23 |
|
TXN |
4.29% |
23 |
|
FMC |
3.30% |
7 |
|
FAST |
2.76% |
28 |
|
ROP |
2.38% |
28 |
|
AMAT |
2.36% |
23 |
|
V |
-0.49% |
28 |
|
MA |
-1.78% |
28 |
|
MS |
-1.94% |
19 |
|
MCO |
-3.44% |
28 |
|
MPWR |
-4.31% |
22 |
|
ICE |
-4.75% |
23 |
|
GS |
-5.06% |
17 |
|
CMCSA |
-9.88% |
28 |
|
SIRI |
-10.84% |
9 |
|
LRCX |
-11.11% |
23 |
|
SBUX |
-13.17% |
12 |
|
DPZ |
-13.20% |
28 |
|
AAP |
-13.39% |
6 |
|
TROW |
-14.14% |
28 |
|
ATVI |
-15.56% |
20 |
|
WST |
-16.70% |
28 |
|
SSNC |
-19.87% |
22 |
|
FDX |
-20.49% |
10 |
|
BX |
-26.61% |
5 |
|
SWKS |
-39.95% |
12 |
|
BALL |
-46.23% |
12 |
|
LAD |
-47.03% |
21 |
|
MKTX |
-47.60% |
23 |
|
PARA |
-60.60% |
18 |
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