Screening For The Best Dividend Growth Stocks (2024)

Introducing the framework for Dividend Scoring

In the previous article, I mentioned that my Stock Relative Scoring System (SRSS) includes Dividend Scoring as a separate category.

I use a total of 13 parameters to calculate scores in four separate categories, which can be used to screen for attractive stocks in the dividend space. The categories are:

1. Dividend Growth
2. Dividend Yield
3. Shareholder Yield
4. Dividend Safety

The Dividend Growth Score is calculated using a total of nine parameters, which include compounded annual growth rates (CAGR), not only of dividends paid per share, but also of the total amount of money paid out by the company as dividends to common shareholders. The reason for this is that some companies may continue to raise their DPS (dividends per share), while decreasing total payouts due to share buybacks and the resulting lower total number of outstanding shares. Unless the company switches from focusing on buybacks to dividends at some point in the future, the DPS growth stemming from the decreased stock count will eventually slow down.

Additionally, the Dividend Growth Score considers the number of consecutive years of higher dividends and the 5/10 A/D ratio, which is a calculation of the acceleration or deceleration of the 5-year vs. the 10-year DGR (Dividend Growth Rate). Data for these two parameters, as well as the 10-year dividend per share CAGR, is sourced from the monthly U.S. Dividend Champions list, courtesy of my fellow Seeking Alpha contributor, Justin Law, whose articles every dividend investor should check out. You can do so here.

The Dividend and Shareholder Yield Scores are calculated in a fairly straightforward way, with the Shareholder Yield Score accounting for dividends and buybacks only, ignoring debt repayment.

The Dividend Safety Score takes into account the dividend payout ratio, free cash flow to dividend ratio and the number of consecutive years of higher dividends. You may notice that the years of dividend growth are used as an input parameter both for the Dividend Growth and the Dividend Safety Score. This is not by accident. Dividend investors pay close attention to the dividend track record of companies considered for investment, and companies are well aware of this, and a long streak of dividend growth is a matter of prestige to them. Therefore, management in a company with an impressive history of raising dividends will be motivated to continue to raise them if at all possible, or at least to maintain the current DPS level.

Screening dividend growth stocks in search for opportunities

Companies are selected from the universe of USA public companies, which trade on regular markets (no OTC markets), pay out dividends and have a market capitalization of at least 300 million dollars. Also, the list does not contain any tobacco stocks. As of the January 24, this initial list contained 1,433 names.

The first round of elimination requires all companies to have a history of at least 13 years of continuously raising their dividends. Before I added this screening criteria, banks and other companies from the Financials sector had dominated the initial Dividend Growth list. It didn't take much research to discover that those companies had slashed their dividends, during the Great Recession of 2008, by roughly 90%. With banks on a long and slow recovery course, it is not surprising that quite a few of them have been increasing their dividends over the past decade. Despite those increases, bank dividends tend to remain below pre-Great Recession levels, as is nicely seen in the example of Zions Bancorporation (ZION).

By introducing a minimum dividend growth period of 13 years, I made sure to include only those companies, which have persisted and continued to not only pay a dividend, but to also raise it – and that in the time of the worst economic crises of the last 90 years. If they weathered the Great Recession without cutting their dividend, I am pretty sure that come a full-scale trade war with China or a corona virus pandemic, they will do their absolute best to keep up with the dividends.

The next round of elimination for the screener excluded the bottom 20% of companies by their dividend yield and shareholder yield. (Note: For the Shareholder Yield, I have included only dividend payments and stock buybacks, while ignoring debt payback, which is often included in the Shareholder Yield.) The logic behind this is obvious, growing dividends are of little use if current yields are abysmally low. Additionally, the screener requires the stock to qualify in the top 30% in at least one of following scores: Value, Dividend Yield or Shareholder Yield. (Note: Basic principles on how I calculate scores in the SRSS are given in the introductory article, here.) If both Dividend and Shareholder Yields are nothing to write home about, then I expect the stock to at least be undervalued, as it leaves more runway for the stock price to appreciate, alongside dividend growth.

In the third step, I require each stock to rank at least 50 for the Dividend Safety Score, which is determined by the dividend payout ratio, free cash flow to dividend ratio, and the number of consecutive years that the company has raised dividends.

Fourth, I eliminate all stocks which are graded as "Very Unattractive" or "Unattractive" on the Main Drivers Score (Value, Growth, Quality and Profitability). From the large initial list of stocks, there are a few bad companies, which somehow slip into the Dividend Growth list. If a company stands poorly in the Main Drivers Score, then I don't see a bright future for it and I don't see a potential for the dividend growth to continue in the long term.

This leaves us with a list of 65 stocks which meet all of the listed criteria. Logic requires that a list of Dividend Growth stocks contains only stocks with Dividend Growth rated "Attractive" or higher. This final requirement eliminated the bottom six stocks.

I seriously considered adding another elimination criterion, by requiring at least somewhat decent recent stock price momentum. Ultimately, I decided against it. Dividend Growth is par excellence a long-term investment strategy, and sometimes the best picks may hide among the most hated stocks. With that in mind, I present you the comprehensive list of all 59 stocks, which qualify under the listed criteria. Beware, there are some names in this list which the market currently absolutely loathes. As this is a "quick pick" list, readers are reminded that they need to do more research before committing a substantial amount of capital into any of the following stocks.

(Download the table in high resolution here.)

For a quicker way to determine where the strengths and weaknesses of each of the stocks lie, here is a color-coded representation of the grades awarded to the individual scores.

(Download the table in high resolution here.)

Let us now take a closer look at the top 10.

A. O. Smith Corporation (AOS)

This water heater company ranks highly, both in the dividend categories and in the Main Drivers of the Stock Relative Scoring System (SRSS) – Growth, Value, Profitability and Quality.

With 26 consecutive years of growing dividends, and at an ever-increasing speed – CAGRs for 10-year, 5-year and 3-year dividends per share (DPS) are 21.5%, 29.7% and 32.3%, respectively, this is a true Dividend Aristocrat. The fairly low dividend payout, and dividend to FCF ratios of 36.4% and 40.7%, indicate that the dividend is very safe. AOS is a Top Pick in the Main Drivers Grade (MDG), with a strong 19% return on invested capital. Their growth and margins are solid and stable. Still, the stock is extremely unloved by the market. This one definitely requires more research. I believe it is a very good long-term opportunity, but buying at this moment may be "catching a falling knife", which hardly anyone wants to do.

Evercore Inc. (EVR)

Evercore is another extremely unloved company, with 1-year stock return of negative 8.3%.

(Note: 1-year stock returns are taken from Finbox.com and are calculated as the total percentage change in a stock price, adjusted for splits, over the last 1 year. Dividends are not accounted for in this measure of stock return. While it may seem counterintuitive not to include returns from dividends, the advantage is that the clear focus, on market performance only, enables better comparison of market sentiment for different stocks.)

Still, the company has a track record of 13 years of increasing dividends, consistently strong DPS growth, and a superior Dividend Safety Score of 96.2. Third quarter last year was the first in the last three years with an actual EPS below the market consensus.

Analyzing exactly why the company's stock performance is so poor is beyond the scope of this article. Nevertheless, for dividend growth investors I would recommend keeping a close eye on this one.

American Financial Group, Inc. (AFG)

AFG offers an attractive 4.7% dividend yield and boasts a track record of 14 years of increasing dividends. The Dividend Safety Score is in the "Top Pick" range, at 98.9. DPS growth is accelerating, as seen from the CAGRs for 10-year, 5-year and 3-year DPS, which stand at 12.2%, 19.6% and 29.5%, respectively.

With its high, growing and very safe dividend yield, any dividend investor should consider adding AFG to their portfolio.

MSC Industrial Direct Co., Inc. (MSM)

MSC is another company which does not receive much love from Mr. Market, but should be interesting to Dividend Growth investors. Similar to AFG, MSC Industrial offers a solid 4.2% dividend yield, boasts a track record of 17 years of increasing dividends and has demonstrated a continuously accelerating DPS growth over the past decade. The CAGRs for 10-year, 5-year and 3-year DPS stand at 13.2%, 17.8% and 20.4%, respectively.

With a Dividend Safety Score of 66.3, which is ok, but not ideal, I would recommend further research into the long-term sustainability of dividend growth.

Franklin Resources, Inc. (BEN)

With 40 consecutive years of dividend growth and a 4.4% dividend yield, BEN is bound to appear on dividend investors’ radar. DPS growth is solid, but not as strong as the stocks listed above. The CAGRs for 10-year, 5-year and 3-year DPS stand at 14%, 16.7% and 13%, respectively. This is the market’s most hated stock among the top 10 Best Dividend Growth Stocks. As stated for other companies which performed poorly, analyzing exactly why the market reacts the way it does is outside the scope of this article. But a bullish sentiment among Seeking Alpha contributors for this stock is an indication that the tide might turn.

Maxim Integrated Products, Inc. (MXIM)

Along with 96.3 Dividend Growth Score and an 18-yearlong streak of growing dividends, MXIM has a very high 5/10 A/D ratio of 1.31 (a metric used thanks to curtesy of Justin Law), which shows that Dividend Growth has strongly accelerated in the past five years. Maxim Integrated is a healthy company with a 97 Profitability and Quality Score.

Nevertheless, their Dividend Safety Score is 58.1, which is the lowest among the top 10, so I would recommend further research into the long-term dividend sustainability.

Lincoln Electric Holdings, Inc. (LECO)

With 25 consecutive years of dividend growth, this company has very recently been promoted to the rank of a Dividend Aristocrat. DPS growth is solid and steady, as seen from CAGRs for 10-year, 5-year and 3-year DPS, which stand at 13.3%, 15.4% and 13.7%. The dividend payout and dividend to FCF ratios stand at 36.2% and 37.7%, which implies a high level of dividend safety. Additionally, LECO has an attractive Profitability and Quality Score of 81.2.

Based on the initial screening, LECO is a candidate for a long-term buy and hold strategy.

Carlisle Companies Incorporated (CSL)

With 43 years of consistently increased dividends, Carlisle has a good chance of reaching Dividend King status in seven years. The DPS average annual growth rates are in the low double digits. What positions CSL in a high position on the list is their Dividend Safety Score of 99, thanks to very low dividend payout and dividend to FCF ratios, which stand at 21.4% and 15.2%.

CSL is an interesting candidate for a retirement portfolio, provided that you can afford to wait for the dividend yield on the investment into CSL to grow. A lot of the future dividend growth is already priced in the stock.

Best Buy Co., Inc. (BBY)

Best Buy would literally have been the best buy among the top 40 companies on the Best Dividend Growth Stocks list, as the stock has returned 59.7% over the past year, not including the dividend. BBY has a conservative dividend payout ratio of 33.9% and a dividend to FCF ratio of 35.7%. Additionally, thanks to the stock's still attractive price and the company's high Profitability and Quality Score, BBY has a total Main Drivers Score (considers Growth, Value and Profitability and Quality) of 92.5.

Further research into BBY should possibly estimate the potential for a price correction, to avoid buying at the top.

Cracker Barrel Old Country Store, Inc. (CBRL)

CBRL offers an attractive 5.3% dividend yield. Unfortunately, their dividend growth has considerably slowed down and the profitability rates of ROIC, ROA and ROE have suffered a little in the past few years. Margins remain stable and strong, while revenue and income are slowly increasing.

It seems to me that this company has long-term potential, but being strongly unloved by the market at this time, potential investors are advised to choose their entry point wisely.

Conclusion

Values in this article reflect market prices as at the market close on January 27^th 2020.

In the following days and weeks, my plan is to follow up with a number of articles, in which I will recommend portfolios of stocks selected by other criteria, such as Dividend Yield, Value Picks, Strongest Growth at Reasonable Price, etc. If you have a specific wish, on which group (sector, industry, size, something else) of stocks you would like to see analyzed, please let me know in the comments.

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I believe that a good investment portfolio should include a balanced mixture of value, growth and dividend stocks. When analyzing a company, I like to get a complete picture – I rarely focus on one issue alone. I am especially intrigued by companies on which the overarching consensus of analysts has already passed judgment, either bullish or bearish, and enjoy discovering overlooked aspects in their financials and business models. I was certified as an investment manager in Bosnia and Herzegovina in 2007. I have survived the domestic market crash in which stocks plummeted 90%. Since then, I have been extremely suspicious of market valuations, always looking for fundamentals and long-term perspective behind them. Since 2014 I've been working full time as a freelance financial analyst.