From the Fed’s faster taper to the spreading Omicron variant, the market’s had a lot to digest recently. Well, it seems like we have a case of indigestion.

The market has not taken these developments in stride. Volatility has picked up as a result. But it’s during turbulent market environments such as this one that the strategy I espouse really shines. That strategy is, of course, dividend growth investing. It’s a strategy whereby you buy and hold shares in world-class enterprises that pay reliable, rising dividends. You can find hundreds of these stocks listed on the Dividend Champions, Contenders, and Challengers list. No matter what’s going on in the stock market, these dividends are consistently flowing directly from the companies to their shareholders – totally bypassing the market’s craziness. That lack of volatility in one’s dividends, despite lots of volatility in one’s stocks, is why this strategy really shines during times like right now. It’s a strategy I’ve been adhering to for more than 10 years now. And what’s it done for me?

Well, quite a bit. It’s radically changed my life. For one, it helped me to retire in my early 30s. My Early Retirement Blueprint describes exactly how I accomplished that, and why this strategy was instrumental toward that end. I now manage the FIRE Fund. That’s my real-money dividend growth stock portfolio. It produces enough five-figure passive dividend income for me to live off of. This strategy is so powerful. And it’s so comforting during times of heightened market volatility. As true as that is, valuation at the time of investment is critical.

Price only tells you what you pay. But it’s the value that tells you what you actually get. An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk. This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued. Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield. That higher yield correlates to greater long-term total return potential. This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.

Prospective investment income is boosted by a higher yield. But the capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value. And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time. These dynamics should reduce risk.

Undervaluation introduces a margin of safety. This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value. It’s protection against the possible downside. Investing in a high-quality company that pays reliable, rising dividends, and doing so when it’s undervalued, sets you up to calmly ride out market volatility and experience excellent long-term total return. Of course, Spotting undervaluation requires one to understand valuation. Fortunately, this isn’t that difficult.

Fellow contributor Dave Van Knapp’s Lesson 11: Valuation, which is part of a larger series on dividend growth investing, deftly explains the ins and outs of valuation and provides an easy-to-follow valuation system that can be applied toward most dividend growth stocks. With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…

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