Double-digit growth rate.  Annual results concept

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The market continues to experience a very high level of uncertainty and volatility despite gaining ground in recent weeks. In recent months, the market has been mostly about Fed policy. First this one month, the Fed raised short-term interest rates by 75 basis points for the fourth consecutive time, which was already in line with expectations. What has changed however have been expectations on the Fed Pivot, which has proved elusive. Furthermore, most market participants now expect the terminal rate to be higher than previously expected, although the pace of interest rate hikes is expected to slow.

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YCharts data

We believe that no one can accurately predict how the market will behave in the next week or six months, especially in the current market environment. That said, regardless of short-term market movements, as long-term DGI investors, we must pay attention to the quality of the companies we invest in and the price we pay. In this article, we focus on selecting and highlighting stocks that have increased their dividends at a rapid pace and will most likely continue to do so in the future for at least the next 3-5 years.

We believe in keeping a shopping list handy and dry powder at the ready so you can capitalize on the opportunity when the time is right.

Note: Please note that the titles selected and highlighted in this article are not buying recommendations per se, but rather candidates for further research. Please exercise due diligence, considering your personal goals and risk tolerance, before making any investment.

Why High Growth Dividend Stocks?

There are two types of dividend stocks that a DGI investor can choose from depending on their individual situation and goals:

  • High growth. Low yield [HGLY]
  • Low growing high yield [LGHY].

As the names suggest, the HGLY category includes stocks that offer a high dividend growth rate but usually a low current yield. These stocks would normally have low payout ratios, manageable debt levels, and rapidly increasing earnings.

On the other hand, LGHY-type stocks would offer a high current yield (typically 3% and above) but a lower dividend growth rate. In general, these companies are more mature, stable companies that have their period of hyper-growth in the rearview but still grow modestly over time to support low but stable dividend growth.

Obviously, there will be stocks that fall somewhere between these two categories, such as average growth and average current yield.

So who should own HGLY stock? Basically, anyone who is in the accumulation phase and doesn’t need the income currently and/or in the next five years should own some high-growth dividend stocks. Also, people, including retirees, who have large investment capital that generates more income than they currently need (e.g., 1.5 times or 2 times their income needs) should invest at least partially in stocks of type HGLY.

Selection criteria

We will be drawing on our original November dataset of nearly 400 stocks, drawn from our other DGI series (5 relatively safe and cheap DGIs). We will then apply additional criteria to filter out stocks that have delivered high dividend growth in the recent past and are likely to continue on this path for the foreseeable future.

For the month of November, the above dataset contains 363 stocks. To get a full spreadsheet of this dataset, check out our Nov. 5th article, “5 Relatively Safe and Cheap DGIs.” For the sake of clarity, we will list the original filter criteria below:

  • Market Cap > $10B ($9B in a bear market)
  • Dividend yield > 1.0% (some exceptions are made to include high quality but lower yielding companies)
  • Average daily volume > 100,000
  • Dividend growth over the last five years >= 0.
  • Preferably, a minimum of 5 years of dividend growth.

The vast majority of these stocks have increased dividend payments for five years or more. However, we will now filter out stocks that have increased their dividend payments by an annual rate of 8% or more. In addition, we will also consider stocks that may not have provided a consistent increase, but overall have provided a cumulative 40% increase in payments over the past five years.

We will now use the following additional criteria to filter for stocks that would fit the mold of high-growth DGI stocks.

  • Payout ratio is less than 70%
  • 5-year dividend growth is at least 8% or higher. This is in line with the growth rate of the benchmark fund, Vanguard Dividend Appreciation ETF (VIG).
  • Soup number (5-year dividend growth plus dividend yield) >= 10.

After applying these criteria, we are left with 168 stocks on our list.

Note: All tables in this article are created by the author unless otherwise noted. Stock data comes from various sources such as Seeking Alpha, Yahoo Finance, GuruFocus, IBD and CCC-List (dripinvesting).

Narrowing the list down to 40 stocks

We know that for a stock to grow its dividend rapidly, it must also grow its earnings at a very high rate. Without earnings growth (earnings per share – EPS), the company cannot grow its dividends for long. Sure, some companies might try to do this by taking on more debt or cutting costs or spending less on R&D, but that can’t be sustained for very long before it starts causing wider problems. So, our focus should be on earnings growth.

In our spreadsheet, we’ll add four more columns of data for each of the actions:

  • EPS (earnings per share) rating.
  • % Change in EPS in the Last Quarter (Actual)
  • Current EPS Quarterly % Change (Estimate)
  • Current Year EPS Change % (estimate).

We will now assign weights to these four data sets for each stock and add them to the original Quality Score to obtain a modified Quality Score that is skewed in favor of high dividend growing stocks. We’ll call this column High Growth Quality Score [HGQS]. We will also import the 5-year average dividend yield for each stock.

Note: Original Quality Score was calculated and taken from the original spreadsheet, as attached in our previous article (5 Relatively Safe and Cheap DGI Stocks for November 2022).

The factors and data that were taken into account to calculate the original Quality Score were:

  • Current yield
  • Dividend growth history (number of years of dividend growth):
  • Payout Ratio – Preferably based on Free Cash Flow.
  • Dividend growth over the past five and ten years
  • EPS growth (average of previous five years of growth and projected growth for the next 3-5 years)
  • Chowder Number: The sum of the 5-year dividend growth rate and the current yield
  • Debt/equity and debt/asset ratios
  • Credit rating from S&P (Standard & Poor’s Global Ratings)
  • Distance from 52-week high (current price minus 52-week high price)
  • Sales or revenue growth over the past five years.

From the list above, we will select 40 stocks based on the following methodology:

  1. Top 10 titles based on highest HG Quality Score
  2. Top 10 stocks based on highest 5-year dividend growth
  3. Top 10 stocks by yield in excess of 5-year average dividend yield.
  4. Top 10 stocks by current discount from 52-week highs.

First, we will remove any title with an HG Quality Score below 70 (we will remove 11 entries from AEM, BALL, INTC, NKE, NRG, NEM and SSNC). We will now remove duplicates from this list as many stocks qualify based on multiple criteria. After removing the duplicates (AAP, AVGO, BBY, CI, EOG, LEN, ODFL, SWKS), we have 20 shares left.

For permanent deletion, we will remove all multiple titles that belong to the same industry segment. For example, we have DHI (DR Horton) and LEN (Lennar) from the home building sector; we will keep DRI as it scores slightly better in the HG Quality Score. We are finally left with 19 names, which are presented in the table below:

Table 1: Top 19 High-Growth DGI Stocks of the Month:

T1

DGI high growth (Author)

Final Step: Selecting DGI’s Top 10 High-Growth Stocks

To some extent, this step is a bit subjective and, to that extent, it is based on our perceptions. Readers might certainly differ from some of our selections and might find their own set of ten companies appropriate for their goals, but they should try to keep the group diverse across different sectors or industry segments. However, below we describe how we pick these ten stocks for November 2022.

    1. As a first step, we’ll sort our list of 19 titles by highest Quality Scores and select the top 5.
    2. Second, we will select two stocks among the largest 5-year dividend growers and two stocks among the largest excess yielders (current yield minus 5-year average yield).
    3. Third, we’ll select at least one name that has the highest discount off its 52-week high.

Here are the final top 10:

(AVGO), (DHI), (EOG), (ODFL), (CSL), (AAP), (CI), (MPWR), (KLAC), (TROW).

Table 2:

T2

DGI high growth (Author)

Past performances:

If we were to compare the performance of these ten stocks against the S&P 500 and the benchmark ETF VIG, the results would be quite encouraging. We assume that our model portfolio was equally invested in the ten stocks selected from Table 2. The performance comparison refers to the period 01-January-2010 to 07-November-2022. However, keep in mind that past performance is no guarantee for the same level of success in the future.

Chart-1:

CR1

Author

Conclusion

In the first week of each month, we publish a broader list of DGI stocks that we believe are relatively safe and appropriate for most DGI investors. We provide three targeted lists for different performance goals. The above lists include all three types of dividend stocks, such as low-growth high-yield, moderate-growth moderate-yield, and high-growth low-yield stocks. However, in this article, we will focus primarily on high-growth dividend stocks, which are likely to offer a high dividend growth rate but may not offer high current yields.

In our rules-based filtering process, we’re narrowing it down to 19 actions right now. As a next step, we subjectively select ten stocks that form a diverse group and are likely to offer high growth at reasonable values.

The top 10 yields 2.02%; however, it is still 35% higher than the group’s 5-year average return. It is almost equal to 1.96% for the benchmark fund Vanguard VIG. However, the 5-year dividend growth for this group is much higher (>40%) than 8% for VIG. The broader group of 19 stocks yield slightly higher at 2.28%. Both groups are highly diversified across many sectors and industry segments.

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