The Dividend Champions (CCC) list contains nearly 900 dividend growth (DG) stocks trading on U.S. exchanges that have paid higher dividends for at least five consecutive calendar years. An accompanying spreadsheet provides valuable data and is updated monthly by SA author Justin Law.
In this article, I rank a subset of the CCC stocks and present the 10 top-ranked stocks for consideration. I now use DVK Quality Snapshots to assess the quality of dividend stocks and rank them by quality score, breaking ties by considering up to three quality metrics, in turn.
This month I decided to rank high-quality CCC stocks trading at least 10% below my fair value estimates. Fear related to the ongoing pandemic of coronavirus disease 2019 (COVID-19) has wreaked havoc in the markets, and economists expect a global recession in the first half of 2020. Many stocks on my watchlist now trade well below fair value and present opportunities for further investment.
Screening and Ranking
The latest CCC list (dated 02/28/20) contains 867 stocks. There are 140 Dividend Champions with increasing calendar year payouts for the past 25 years; 294 Dividend Contenders (past 10-24 years); and 433 Dividend Challengers (past 5-9 years).
I decided to screen for DG stocks with quality scores in the range 23-25 that are trading at least 10% below my fair value estimates. Thirty-four of the DG stocks in the CCC spreadsheet pass these filters.
Fair Value Estimates
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 five-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.
Ranking by Quality
To rank the 34 candidates, I used the DVK Quality Scoring System to obtain quality scores, and considered the following factors as tie-breakers:
- SSD Dividend Safety Scores
- S&P Credit Ratings
- Dividend Yield
Each stock’s Rank is shown in the tables below.
Top 10 High-Quality, Discounted Stocks
Here are the top 10 discounted stocks in rank order:
Top 10 Dividend Growth Stocks for March 2020
The stocks I own in my DivGro portfolio are highlighted.
1 Raytheon (RTN) – Industrials
Established in 1922 and headquartered in Waltham, Massachusetts, RTN is a leading U.S. military contractor, specializing in defense, security, and civil markets throughout the world. The company provides state-of-the-art electronics, mission systems integration, cybersecurity systems, and communications and intelligence systems. RTN also provides business and special mission aircraft.
2 Honeywell International (HON) – Industrials
HON is a diversified technology and manufacturing company with worldwide operations. The company provides aerospace products, software, and services; control, sensing and security technologies; materials, process technologies, and automation solutions; and productivity, workplace safety, and asset performance solutions. HON was founded in 1920 and is based in Morris Township, New Jersey.
3 General Dynamics (GD) – Industrials
Headquartered in Falls Church, Virginia, 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.
4 Union Pacific (UNP) – Industrials
Omaha, Nebraska-based 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.
5 Chevron (CVX) – Energy
Founded in 1984 and based in San Ramon, California, CVX is a multinational energy corporation involved in all aspects of the oil and gas industries, including exploration and production; refining, marketing and transport; chemicals manufacturing and sales; and power generation. CVX is one of the largest integrated energy companies in the world, with operations in about 180 countries.
6 UnitedHealth (UNH) – Healthcare
Founded in 1974 and based in Minnetonka, Minnesota, UNH is a diversified health and well-being company with core capabilities in clinical expertise, advanced technology, and data and health information. UNH provides medical benefits to customers in the United States and in more than 125 other countries.
7 Franklin Resources (BEN) – Financials
BEN is a global investment management company operating as Franklin Templeton Investments. The company provides investment management and related services to retail, institutional, and high net-worth clients in jurisdictions around the world. BEN was founded in 1947 and is based in San Mateo, California, with an additional office in Hyderabad, India.
8 United Technologies (UTX) – Industrials
Founded in 1934 and headquartered in Farmington, Connecticut, UTX provides high technology products and services to building systems and aerospace industries around the world. The company operates in several segments: the Otis segment, the UTC Climate, Controls & Security segment, the Pratt & Whitney segment, and the UTC Aerospace Systems segment.
9 JPMorgan Chase (JPM) – Financials
JPM is a financial holding company providing investment banking, financial services, commercial banking, financial transaction processing, and asset management. With assets of about $2.6 trillion, the company serves many prominent corporate, institutional, and government clients around the world. JPM was founded in 1799 and is headquartered in New York, New York.
10 Emerson Electric (EMR) – Industrials
EMR provides technology and engineering solutions to industrial, commercial, and consumer markets worldwide. The company is engaged in the design, manufacture, and sale of a broad range of electrical, electromechanical and electronic products and systems. EMR was founded in 1890 and is headquartered in St. Louis, Missouri.
Please note that the top 10 discounted stocks are candidates for further analysis, not recommendations.
Key Metrics and Fair Value Estimates
Below, I provide tables 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), and the Chowder Number (CDN).
To obtain a stock’s CDN, add its current dividend yield and its five-year annual dividend growth rate (DGR) together. I color code CDNs by their likelihood to deliver annualized returns of at least 8%. Green CDNs are likely, yellow CDNs are less likely, and red CDNs are unlikely to deliver annualized returns of at least 8%.
I also provide the 5 quality indicators used in determining each stock’s quality score (Qual), as well as fair value estimate (Fair Val.) to help identify stocks that trade at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of a recent price to my fair value estimate.
Since its all-time high closing price of $3,386.15 on 19 February, the S&P 500 dropped about 32%. Every single stock in this month’s top 10 dropped more, the worst performer being CVX with a drop of more than 46%:
No wonder these stocks are deeply discounted!
Of the stocks I own, GD is not yet a full position in my portfolio, which I consider to 1% of total portfolio value. Given GD’s price drop, the stock’s CDN has moved into the favorable range (indicated by green in the CDN column), so I’d be interested in adding shares to my GD position to turn it into a full position. Adding 21 shares will bring my GD investment to a full position, given the current situation.
Three other stocks in this month’s list are not yet full positions, either. UNP and JPM both have favorable CDNs and therefore seem to offer opportunities to go to full positions. To do so, I’d need to add 19 shares to UNP, and 24 shares to JPM, respectively. On the other hand, CVX is not yet offering a favorable CDN, despite its yield ballooning to over 8%! With ample opportunities elsewhere and some uncertainty about the near-term prospects of Energy sector stocks in the Energy sector, I’m not prepared to add CVX shares at this time.
RTN, HON, and UNH essentially are full positions, so I’m not looking to add shares at this time. However, all three stocks offer favorable CDNs and are likely to return at least 8% in annualized returns going forward.
Of the stocks I don’t own, BEN continues to pop up on my screens. For example, BEN is one of 64 Dividend Aristocrats I recently ranked by quality score. The company continues to face powerful headwinds due to a secular trend away from higher cost (and usually underperforming) active funds, but its acquisition of Legg Mason will allow the company to leverage synergies. I’m planning to revisit BEN to see if an investment is warranted.
While both UTX and EMR are trading at deep discounts to fair value, their CDNs fall outside the favorable range, so I’m not interested in opening positions at this time. This year I’m looking to improve my portfolio’s growth prospects by favoring stocks with higher dividend growth rates, and I use the CDN as a guiding metric.
In this article, I ranked 34 high-quality stocks in the CCC list with quality scores in the range 23-25 and presented the 10 stocks trading at the largest discounts to my fair value estimates.
I own several stocks in this month’s top 10. GD, UNP, and JPM are not yet full positions in my portfolio and, given their favorable CDNs, I’ll consider adding shares to these positions first.
Industrials sector stocks dominate the top 10 with six representatives. For that reason, I’ll present the top discounted stock in each GICS sector in a bonus section below.
Thanks for reading and take care, everybody!
Bonus Section: Top Discounted Stocks by GICS Sector
In the following table, I’m presenting the top discounted stock in each of the GICS sectors regardless of rank. Note that I expanded the range of quality scores to 19-25 in order to cover all GICS sectors.
Disclosure: I am/we are long RTN, HON, GD, UNP, CVX, UNH, JPM, T, PSX, WFC, IBM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.