E High-Quality, High Yield Dividend Growth Stocks Trading Below Fair Value

This article presents several high-quality, discounted dividend growth [DG] stocks yielding at least 4%. For each stock, I present key metrics, quality indicators, a fair value estimate, and the so-called Chowder number. In my view, the stocks are good candidates for further research and possible investment.

Quality

There are many ways to assess the quality of companies, but I favor an approach devised by David Van Knapp to employ five widely used, independent quality indicators. I've been using a slightly modified version of this quality scoring system to rank DG stocks, including the Dividend Kings, an elite group of stocks with 50 consecutive years of dividend increases.

Quality Scoring System

My modifications include assigning points to companies that don't have an S&P Credit Rating but carry no or little debt. My color coding scheme is similar to the one used in the original article, though I differentiate perfect scores.

Valuation

To estimate fair value, I reference fair value estimates and price targets from several sources:

  • Morningstar: fair value estimate based on discounted cash flow analysis.
  • Finbox.io: fair value estimate based on several financial models.
  • Finbox.io: the average of analyst targets.

Additionally, I estimate fair value using the 5-year average dividend yield of each stock using data from Simply Safe Dividends:

fair value estimate = recent price × dividend yield ÷ 5-year average dividend yield

With several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.

Key Metrics

In addition to quality indicators and quality scores, I provide columns with key metrics of interest to DG investors, including years of consecutive dividend increases [Yrs], the dividend Yield for a recent stock Price, and the 5-year compound annual dividend growth rate [5-Yr DGR].

Furthermore, I also provide the so-called Chowder number [CDN], obtained by summing the Yield and the 5-Yr DGR. The Chowder Rule favors DG stocks likely to produce annualized returns of 8% by requiring:

  • CDN ≥ 15 for stocks yielding less than 3%, 
  • CDN ≥ 12 for stocks yielding at least 3%, and
  • CDN ≥ 8 for stocks in the Utilities sector, provided they yield at least 4%. 
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Disclosure: Long: BNS, CVX, IBM, T, VZ, XOM

Disclaimer: I'm not an investment professional or a licensed financial advisor. This article represents my personal views and decisions, ...

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