Quality Stocks
The SPDR S&P 500 Trust ETF (SPY) added 1.21% in July following a late rally in a very volatile month. Vanguard’s Dividend Appreciation Index Fund ETF Shares (VIG) posted a more impressive gain of 3.97%, outperforming SPY during the month for the first time this year. And my watchlist performed the best of the three, positing a gain of 5.16%. Despite the strong return in July 2024 has not been a good year for my watchlist. Year-to-date, my watchlist is up a meager 0.06%, meanwhile VIG is up 11.93% and SPY is up 16.62%. While this underperformance is very large, strong past performance has kept the watchlist marginally ahead of VIG since inception.
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.
July ended the watchlist’s longest streak of underperformance relative to VIG and SPY, surpassing the prior longest losing streak (4 months) by a full 2 months.
Even though SPY and VIG are off to a better start this year, following July my watchlist regains its lead on VIG and sees its gap to SPY shrink. Since inception, September 2020, the watchlist has a CAGR of 12.25% compared to 12.04% for VIG and 14.05% for SPY.
My goal is not to beat SPY or VIG, but to generate a long-term rate of return of at least 12%. The strong performance from July sees the watchlist move ahead of its long-term goal once again.
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 August 2024 offer an average dividend yield of 1.49%. Collectively, they have increased dividend payments at a rate of 22.51% 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 August 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 114 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 August 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. Albermale (ALB) and Sherwin-Williams (SHW) have fallen further down the list, or do not meet the 12% expected rate of return threshold and were replaced by Amphenol (APH) and Elevance Health (ELV).
Past Performance
The top 15 list from July posted a solid gain of 5.16%, outperforming both benchmarks, and as a result, the long-term alpha has improved. The long-term annualized rate of return for the watchlist increased from 11.07% last month to 12.25%. My target rate of return is 12%, and the modest improvement in July has moved the watchlist above its target.
Month |
Top 15 |
All |
VIG |
SPY |
1 Month |
5.16% |
0.78% |
1.41% |
3.53% |
3 Month |
7.56% |
-2.78% |
0.46% |
4.39% |
6 Month |
2.93% |
9.80% |
10.57% |
14.80% |
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 |
0.06% |
9.16% |
11.93% |
16.62% |
Since Inception |
57.26% |
57.71% |
56.07% |
67.37% |
Annualized |
12.25% |
12.33% |
12.04% |
14.05% |
Top 5 past and present watchlist stocks in July 2024:
- Sirius XM Holdings (SIRI) +21.91%
- Old Dominion Freight Line (ODFL) +19.01%
- Sherwin-Williams (SHW) +17.55%
- SS&C Technologies (SSNC) +16.40%
- Lockheed Martin (LMT) +16.02%
Three of the top 15 stocks selected for the month of July was amongst the top 5 performing stocks last month; Sirius XM, Old Dominion and Sherwin-Williams. In total, there have been 84 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) +778.40% (40 months).
- KLA Corporation (KLAC) +171.08% (39 months).
- Progressive (PGR) +153.19% (42 months).
- Cintas (CTAS) +148.40% (42 months).
- Monolithic Power Systems (MPWR) +136.20% (41 months).
Since not all stocks have been on the watchlist for the full 47 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 +5.58% (42 months)
- Discover Financial Services +4.54% (11 months)
- Bank of America +3.34% (11 months)
- KLA Corporation +2.59% (39 months)
- Progressive +2.24% (42 months)
Drivers Of Alpha
The watchlist outperformed VIG in July. Eight watchlist stocks outpaced the ETF last month.
- (SIRI) +21.91%
- (ODFL) +19.01%
- (SHW) +17.55%
- (UNH) +13.14%
- (MSCI) +12.25%
- (MA) +5.27%
- (GPN) +5.11%
- (ZTS) +4.10%
The remaining 7 stocks underperformed VIG.
- (CCEP) +1.24%
- (V) +1.22%
- (NKE) -0.68%
- (ROL) -1.80%
- (ALB) -1.94%
- (CNI) -2.01%
- (DPZ) -16.97%
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 84 stocks that are on this list, 65 (65 last month) have positive total returns and 19 have negative total returns, the average return is 44.83% (41.77% last month). The watchlist has been around for 47 months, and the average duration for all 84 stocks is 33.95 months.
Symbol |
Since Joining |
Count |
NVDA |
778.40% |
40 |
KLAC |
171.08% |
39 |
PGR |
153.19% |
42 |
CTAS |
148.40% |
42 |
MPWR |
136.20% |
41 |
COST |
131.92% |
47 |
AMAT |
125.93% |
42 |
APH |
112.82% |
42 |
BK |
108.23% |
47 |
ADP |
105.35% |
47 |
LRCX |
97.96% |
42 |
TSCO |
96.59% |
42 |
INTU |
92.15% |
47 |
MSFT |
91.52% |
47 |
TJX |
86.55% |
42 |
JPM |
82.01% |
42 |
UNH |
81.57% |
42 |
CDW |
72.24% |
42 |
DFS |
63.01% |
11 |
SHW |
62.05% |
42 |
FAST |
61.33% |
47 |
LMT |
61.23% |
47 |
ROL |
60.51% |
30 |
MCO |
60.38% |
47 |
BLK |
55.01% |
47 |
CI |
53.05% |
29 |
LOW |
52.93% |
47 |
MSCI |
50.06% |
47 |
NOC |
49.73% |
47 |
BX |
48.58% |
24 |
GS |
47.11% |
36 |
GGG |
46.66% |
47 |
ACN |
45.90% |
47 |
BBY |
45.77% |
25 |
EXPD |
45.05% |
42 |
ICE |
43.77% |
42 |
BAC |
43.56% |
11 |
FDX |
43.17% |
29 |
HD |
42.26% |
47 |
WRB |
36.72% |
16 |
TXN |
35.53% |
42 |
TMO |
35.42% |
40 |
USB |
34.87% |
45 |
MA |
32.35% |
47 |
ROP |
30.40% |
47 |
SCHW |
29.31% |
42 |
V |
28.75% |
47 |
MS |
27.09% |
38 |
NTRS |
22.86% |
47 |
FDS |
22.18% |
47 |
MCHP |
20.43% |
14 |
EOG |
19.55% |
17 |
KR |
18.77% |
13 |
ALLE |
15.82% |
13 |
SSNC |
14.91% |
41 |
CMCSA |
11.91% |
47 |
DE |
11.65% |
32 |
WTRG |
10.65% |
7 |
ZTS |
10.34% |
18 |
DPZ |
9.62% |
47 |
JKHY |
9.02% |
47 |
WST |
8.82% |
47 |
ELV |
8.50% |
6 |
CCEP |
6.70% |
4 |
ATVI |
4.39% |
29 |
CRH |
-0.21% |
4 |
ALB |
-1.94% |
1 |
CNI |
-2.01% |
1 |
ROST |
-2.17% |
4 |
HUM |
-2.27% |
41 |
TROW |
-3.94% |
47 |
ODFL |
-4.74% |
5 |
GPN |
-21.27% |
5 |
SWKS |
-22.17% |
31 |
LAD |
-27.72% |
40 |
SBUX |
-29.39% |
31 |
NKE |
-30.53% |
7 |
BALL |
-31.48% |
31 |
DG |
-38.24% |
40 |
SIRI |
-45.41% |
28 |
FMC |
-49.34% |
26 |
MKTX |
-57.28% |
42 |
AAP |
-61.49% |
25 |
PARA |
-72.50% |
37 |
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 Amphenol.
The chart below shows the actual price of Amphenol (black line) graphed along with the following 3 valuation zones. The dark green zone shows valuations of 15% below fair value and above. The light green zone shows the fair value to 15% below fair value range. And the red zone shows the fair value to 15% overvalued zone.
Here is the historical dividend yield.
Here is the dividend history.
Year | Dividend | Growth | CAGR |
2024 | 0.55 | 29.41% | |
2023 | 0.43 | 4.94% | 29.41% |
2022 | 0.41 | 27.56% | 16.53% |
2021 | 0.32 | 22.12% | 20.10% |
2020 | 0.26 | 8.33% | 20.60% |
2019 | 0.24 | 9.09% | 18.04% |
2018 | 0.22 | 25.71% | 16.50% |
2017 | 0.18 | 20.69% | 17.77% |
2016 | 0.15 | 9.43% | 18.13% |
2015 | 0.13 | 17.78% | 17.13% |
2014 | 0.11 | 47.44% | 17.20% |
2013 | 0.08 | 45.33% | 19.67% |
2012 | 0.05 | 21.62% |
Up next is Elevance Health.
Here is the historical dividend yield.
Here is the dividend history.
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% |
Final Thoughts
While this watchlist has produced some terrific investment ideas, it has also pointed out some awful stocks along the way. Three of the stocks presented during the last 47 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 eighteen 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.
Read the full article here