In this series of articles, we focus on selecting and highlighting stocks that have rapidly grown their dividends in the recent past. We also need to ensure that these stocks will likely grow their earnings at a fast pace in the upcoming years. Due to their hypergrowth, their price generally grows quickly, and they usually do not pay very high current yields. With high-growth stocks, we need to be content with a lower current yield. However, please keep in mind that nothing is permanent, and with time, their business model matures, or new competition/technology can emerge and change their growth patterns. That’s why it may be important that we monitor these stocks at least every quarter.
If you need higher yields, please read the most recent article from our monthly series titled “5 Relatively Secure and Cheap DGI,” which focuses on moderate to high current income – favoring high-yield names. Irrespective of whether your goal is high dividend growth or high current income, we always need to pay attention to the quality of companies that we invest in and the price we pay.
Note: Please note that the stocks shortlisted and highlighted in this article are not buy recommendations per se but rather candidates for further research. Before making any investments, please use your due diligence, considering your personal goals and risk tolerance. Also, some sections in the article (Introduction, Selection methodology/process, etc.) will be repetitive from month to month for the benefit of the new readers. Such sections would be displayed in “italics,” and regular readers could skip them.
Why High Growth Dividend Stocks?
There are two types of dividend stocks that a DGI investor can choose from depending upon their individual situation, goals, and investing time horizon:
High Growth Low Yield [HGLY]
Low Growth High Yield [LGHY].
As the names suggest, the HGLY category would have stocks that offer a high rate of dividend growth but usually a low current yield. These stocks would normally have low payment ratios, manageable levels of debt, and rapidly rising earnings.
On the other hand, LGHY-type stocks would offer a high current yield (generally 3% and higher) but a lower rate of dividend growth. Generally speaking, these companies are more mature and stable businesses that have their hyper-growth period in the rearview but still grow modestly over time to support a low but stable growth in dividends.
Obviously, there will be stocks that fit somewhere in between these two categories, for example, medium growth and medium current yield.
So, who should own HGLY-type stocks? Basically, anyone who is in the accumulation phase and does not need the income currently and/or in the next five to ten years should own some high-growth dividend stocks. In addition, folks (including retirees) with large investment capital that generates more income than they need (for example, 1.5x or 2x their income needs) should invest in HGLY-type stocks, at least partially.
How To Structure A Portfolio Based On This Series
Though it would depend a great deal on your personal goals, risk tolerance, investment methodology, and choices; however, if you wish to make a portfolio based on this monthly series, here is one way to do it:
Make a portfolio budget and provision to have a maximum of 20 stocks over time.
Divide your capital (current + future) into 20 equal parts.
In the first month, buy 5 to 6 positions based on the 10 top stocks for that month.
From the next month onwards, check for the new stocks appearing in the top 10 list that are not part of your portfolio, and add new positions (possibly no more than two a month or as many as your process and budget allow).
Repeat step 4 until you reach 20 (or max) positions.
When you have reached the maximum 20 positions and have no more capital to add, look for new stocks in our monthly report or based on your own research. If you decide to add a position, you need to find a position you would like to drop and replace it with a new one.
It may also be recommended to monitor your positions periodically, preferably monthly, but at least quarterly. Also, make sure that you do not overweight any particular sector or industry segment.
Selection Criteria
We will draw upon our original current month’s data set, taken from our other DGI series (5 Relatively Safe and Cheap DGI), and update it with the current data. We will then apply additional criteria to filter out stocks that have provided a high rate of dividend growth in the recent past and are likely to continue on that path for the foreseeable future.
Please see our original article to get a complete spreadsheet of this dataset. To ensure clarity, we will outline the original filtering criteria below:
– Market cap > $10 billion (with some exceptions)
– Dividend yield > 1.0% (with some exceptions for high-quality but lower-yielding companies)
– Daily average volume > 100,000
– Dividend growth in the past five years >= 0 (high growth will be checked later)
– Preferably, a minimum of 5 years of positive dividend growth
Following the initial filter, we calculated a score called the Dividend Safety Quality Score based on several factors:
– Current Yield
– Dividend growth history (number of years of dividend growth)
– Payout ratio (preferably based on Free Cash Flow)
– Past five-year and 10-year dividend growth
– EPS growth (average of previous five years and expected next 3-5 years)
– Chowder number (sum of 5-year dividend growth rate and current yield)
– Debt/equity and Debt/asset ratios
– S&P’s credit ratings
– Distance from 52-week high
– Sales or revenue growth for the past five years
Additional Criteria for Dividend Growth Stocks:
– Stocks that have increased their dividend payouts by an average annual rate of 8% or more
– Stocks that have provided a cumulative increase of 30% in payouts in the past five years
– Payment ratio (on a cash-flow or EPS basis) is less than 80%
– 5-year dividend growth is at least 7.5% or greater
– Chowder number >= 9
After applying these criteria, we are left with under 300 stocks on our list. Further filtering will be done to select the best candidates.
The importance of earnings growth for dividend growth stocks is emphasized, and additional data columns will be added to evaluate this growth for each stock.
Narrowing down the list to 20 stocks will be based on criteria such as HG-Quality-Score, dividend growth, EPS rating, and RS rating.
Tables will be used to display the top stocks based on these criteria, and duplicates will be removed to finalize the list. Stocks with negative revenue growth over the past five years will also be eliminated. The list of high-growth DGI stocks has been carefully curated through a series of filtering steps to ensure that only the top-performing stocks are included. Starting with an average calculation of EPS and RS ratings, followed by eliminating names with ratings below certain thresholds, the list has been narrowed down to 20 promising stocks.
Further refinement was done by removing stocks with low RS ratings and avoiding over-concentration in specific sectors or industries. The final selection process involved selecting the top 10 stocks from the list of 20 based on sector-industry segments and net quality scores. The chosen stocks for this month include (FIX), (BAC), (MSFT), (NTAP), (QCOM), (CSL), (LLY), (DKS), (AVGO), and (NRG).
It is important to note that the methodology used for selecting these stocks may lead to some repeats from previous months, as stocks are only changed if there are significant reasons to do so. The performance of the model portfolio of these high-growth stocks is compared to benchmark indices like the Vanguard Dividend Appreciation ETF (VIG) and the S&P 500, providing a historical perspective on their performance.
While past performance is not indicative of future results, the careful selection process and monitoring of these high-growth DGI stocks can provide valuable insights for investors looking to build a diversified and high-performing portfolio. Moreover, the benchmarks’ performance may not align with that of a buy-and-hold portfolio. This is because we evaluate performance based on specific start and end dates each month to match our 10-HG portfolio.
In our monthly analysis, our main focus is on identifying high-growth dividend stocks, rather than just any dividend stock. These stocks are typically in a phase of rapid growth, leading to higher valuations and lower dividend yields. Currently, most of the stocks on our list are trading near their 52-week highs, reflecting the overall market’s near all-time peak. It is important to note that if the market experiences a downturn, these stocks may face further declines. Therefore, this list may not be suitable for conservative investors but is more geared towards a growth-oriented audience.
Through a systematic filtering process, we start with a broad selection of stocks each month and narrow it down to less than 20 names. Finally, we apply subjective analysis and judgment to choose ten stocks that offer a diversified portfolio with strong potential for high growth at reasonable values.