Quality Stocks
The market woes from April were quickly forgotten as the S&P 500 got back on track in May. The SPDR S&P 500 Trust ETF (SPY) posted a strong gain of 5.06%, turning its Q2 return positive. Vanguard's Dividend Appreciation Index Fund ETF Shares (VIG) posted a more modest gain of 3.33%, not quite enough to erase the losses from April. Meanwhile, my watchlist underperformed both benchmarks, posting a very modest gain of 1.58%. 2024 has not been a strong year for the watchlist, following May it is down 5.5% on the year, relative to a gain of 6.16% for VIG and 11.30% for SPY.
This isn't the first time the watchlist found itself in a rough patch, and it likely won't be the last. However, relying on long-term data, I have conviction the strategy will bounce back and recoup lost ground in the months to come.
This is the first 5 month streak of underperformance for the watchlist relative to SPY since inception. Previously, the longest losing streak was 4 months, on two separate occasions.
Even though SPY and VIG are off to a better start, my watchlist remains slightly ahead of the latter and trails the former by a narrow margin. Since inception, September of 2020, the watchlist has a CAGR of 11.12% compared to 11.02% for VIG and 13.30% for SPY.
My goal is not to beat SPY or VIG but to generate a long-term rate of return of at least 12%. Even though the watchlist saw its long term CAGR improve following May, it still has a little more ground to cover in order to reach its target return.
The main goal of this watchlist is to find the best combination of high-quality companies trading for attractive prices. I believe this is the optimal long-term strategy for building wealth.
The top 15 dividend growth stocks for June 2024 offer an average dividend yield of 1.37%. Collectively, they have increased dividend payments at a rate of 23.18% during the last 5 years. Based on dividend yield theory, these 15 stocks are about 28% undervalued right now, and I think they are poised to offer strong long-term returns.
I would suggest considering two approaches to dividend investing. The first involves dollar-cost averaging into a diversified portfolio comprising at least 10-20 high-quality dividend-paying stocks spanning various sectors and industries. By adopting a dollar-cost averaging strategy, you mitigate the risk associated with attempting to time the market. Over an extended period, this method allows you to acquire shares at market highs, lows, and in-between, ultimately establishing an average cost basis situated in the middle.
The second method introduces a slightly higher level of risk. It entails investing in undervalued stocks while still adhering to a dollar-cost averaging strategy. In this approach, you diversify across a minimum of 10-20 distinct, high-quality companies spanning multiple sectors and industries. The increased risk stems from the possibility that your valuation methodology may prove inaccurate. However, by spreading investments across multiple stocks, the likelihood of correctly identifying undervalued opportunities may improve. The potential upside resulting from accurate selections may well outweigh any underperformance stemming from less successful picks.
Watchlist Criteria
The criteria used to determine which stocks are included in my high-growth dividend stock watchlist remain unchanged for June 2024. 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 112 stocks for the month 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 and that it will generate a 12% annualized rate of total return.
Watchlist For June 2024
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.
There are 2 changes to the top 15 list from the prior month. Monolithic Power Systems (MPWR) and Ross Stores (ROST) have fallen further down the list, or do not meet the 12% expected rate of return threshold and were replaced by Elevance Health (ELV) and FedEx (FDX).
Past Performance
The top 15 list from May posted a modest gain of 1.58%, underperforming both benchmarks, and as a result, the long-term alpha has shrunk further. The long-term annualized rate of return for the watchlist increased from 10.91% last month to 11.12%. My target rate of return is 12%, and the modest improvement in May was not enough to propel the watchlist over its goal.
Month Top 15 All VIG SPY 1 Month 1.58% 2.25% 3.33% 5.06% 3 Month -3.65% 0.46% 1.41% 4.12% 6 Month 3.49% 12.26% 10.54% 16.39% 1 Year 10.61% 23.81% 19.85% 28.04% 2020 6.27% 6.15% 9.09% 7.94% 2021 33.81% 31.55% 23.75% 28.76% 2022 -8.58% -15.12% -9.80% -18.16% 2023 20.89% 21.88% 14.50% 26.18% 2024 -5.50% 3.85% 6.16% 11.30% Since Inception 48.52% 50.03% 48.02% 59.73% Annualized 11.12% 11.43% 11.02% 13.30%
Top 5 past and present watchlist stocks in May 2024:
- Nvidia (NVDA) +26.89%
- Humana (HUM) +18.55%
- Best Buy (BBY) +15.18%
- Costco (COST) +12.03%
- Texas Instruments (TXN) +11.32%
None of the top 15 stocks selected for the month of May was amongst the top 5 performing stocks last month. In total, there have been 82 unique dividend stocks selected by this watchlist since September 2020. It is worthy to note that Activision Blizzard was amongst this list prior to being acquired by Microsoft.
Top 5 Stocks by Total Return since joining the watchlist:
- Nvidia (NVDA) +722.93% (38 months).
- KLA Corporation (KLAC) +150.13% (37 months).
- Progressive (PGR) +149.57% (40 months).
- Applied Materials (AMAT) +129.00% (40 months).
- Costco (COST) +128.19% (45 months).
Since not all stocks have been on the watchlist for the full 45 months of their 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.
- NVIDIA +5.70% (40 months)
- Bank of America +3.94% (9 months)
- Discover Financial Services +3.72% (9 months)
- Coca-Cola Europacific +3.25% (2 months)
- KLA Corporation +2.51% (37 months)
Drivers Of Alpha
The watchlist underperformed VIG in May. Only five watchlist stocks outpaced the ETF last month.
- (TJX) +9.99%
- (MPWR) +9.91%
- (ROST) +7.88%
- (MSCI) +6.65%
- (ZTS) +6.48%
The remaining 10 stocks underperformed VIG.
- (NKE) +3.02%
- (ROL) +2.86%
- (UNH) +2.41%
- (SHW) +1.63%
- (V) +1.62%
- (MA) -0.92%
- (SIRI) -3.25%
- (ODFL) -3.56%
- (DPZ) -3.91%
- (GPN) -17.04%
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 82 stocks that are on this list, 64 (62 last month) have positive total returns and 28 have negative total returns, the average return is 38.61% (33.58% last month). The watchlist has been around for 45 months, and the average duration for all 82 stocks is 32.78 months.
Symbol Since Joining Count NVDA 722.93% 38 KLAC 150.13% 37 PGR 149.57% 40 AMAT 129.00% 40 COST 128.19% 45 CTAS 120.45% 40 APH 118.86% 40 TSCO 112.99% 40 MPWR 101.00% 39 LRCX 100.01% 40 ADP 90.40% 45 MSFT 90.04% 45 BK 89.35% 45 CDW 76.59% 40 JPM 72.34% 40 INTU 70.86% 45 TJX 70.18% 40 UNH 55.43% 40 ROL 53.07% 28 CI 50.64% 27 FAST 49.63% 45 SCHW 48.80% 40 BAC 41.57% 9 BBY 41.45% 23 EXPD 39.66% 40 MCO 39.48% 45 NOC 39.35% 45 LMT 38.99% 45 DFS 38.87% 9 GGG 38.81% 45 MSCI 37.41% 45 LOW 37.16% 45 SHW 35.97% 40 BLK 35.63% 45 WRB 32.94% 14 V 32.04% 45 GS 31.93% 34 MCHP 31.88% 12 DPZ 29.66% 45 HD 29.39% 45 TXN 28.86% 40 MA 27.41% 45 ROP 27.35% 45 ICE 26.60% 40 TMO 25.32% 38 BX 25.22% 22 ACN 24.04% 45 USB 20.37% 43 FDX 19.65% 27 FDS 19.57% 45 MS 19.40% 36 WST 17.72% 45 EOG 16.63% 15 NTRS 15.70% 45 KR 14.14% 11 DE 12.04% 30 ELV 9.49% 4 CMCSA 7.66% 45 CCEP 6.60% 2 JKHY 4.70% 45 ATVI 4.39% 29 ZTS 3.67% 16 ALLE 2.71% 11 WTRG 2.70% 5 TROW -1.96% 45 SSNC -2.63% 39 HUM -3.44% 39 ROST -4.77% 2 CRH -4.80% 2 NKE -12.14% 5 ODFL -20.69% 3 GPN -21.32% 3 BALL -25.68% 29 SBUX -27.34% 29 DG -30.08% 38 LAD -33.78% 38 SWKS -36.53% 29 FMC -47.62% 24 SIRI -55.37% 26 AAP -57.21% 23 MKTX -61.98% 40 PARA -71.46% 35
Dividend Analysis for New Stocks
Below are a 7-year dividend yield theory chart, a dividend history chart, and a dividend growth table for the 2 new stocks on the watchlist this month.
First up is Elevance Health.
Year Dividend Growth CAGR 2024 6.52 10.14% 2023 5.92 15.63% 10.14% 2022 5.12 13.27% 12.85% 2021 4.52 18.95% 12.99% 2020 3.80 18.75% 14.45% 2019 3.20 6.67% 15.30% 2018 3.00 11.11% 13.81% 2017 2.70 3.85% 13.42% 2016 2.60 4.00% 12.18% 2015 2.50 42.86% 11.24% 2014 1.75 16.67% 14.06% 2013 1.50 30.43% 14.29% 2012 1.15 15.56%
Up next is FedEx.
Year Dividend Growth CAGR 2024 5.04 2.23% 2023 4.93 17.38% 2.23% 2022 4.20 44.83% 9.54% 2021 2.90 11.54% 20.23% 2020 2.60 0.00% 18.00% 2019 2.60 6.12% 14.15% 2018 2.45 28.95% 12.77% 2017 1.90 31.03% 14.95% 2016 1.45 52.63% 16.85% 2015 0.95 26.67% 20.37% 2014 0.75 27.12% 20.99% 2013 0.59 7.27% 21.53% 2012 0.55 20.27%
Final Thoughts
While this watchlist has produced some terrific investment ideas, it has also pointed out some awful stocks along the way. Four of the stocks presented during the last 45 months have gone on to lose more than 50%. A watchlist, much like an index, includes both good and bad companies. It's very difficult to create an automated stock selection strategy that only produces great ideas. However, rather than focusing on the few bad apples that have appeared on this list, let's shed a little light on its success. Ten stocks identified by this process have gone on to produce returns in excess of +100% and another ten have generated returns in excess of 50%.
I have used this list to find many great stocks that I have added to my personal portfolio, but I encourage you to use it primarily as a starting point for further research. The watchlist aims to find the best combination of high-quality companies trading for attractive prices. It's based purely on quantitative data and therefore may not consider important qualitative factors that may impact future returns.
Dividend Yield Theorist
I have a masters degree in Analytics from Northwestern University and a bachelors degree in Accounting. I have worked in the investment arena for over 10 years starting as an analyst and working my way up to a management role. Dividend investing is a personal hobby and I look forward to sharing my thoughts with the Seeking Alpha community.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of DPZ, MA, MSCI, ODFL, ROL, TJX, UNH, V either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
