There is a subset of stocks that I think treats money particularly well.

Those are high-quality dividend growth stocks. It takes a special kind of stock to reliably pay out dividends for decades. That’s because it takes a special kind of business to produce the necessary profit for decades. High-quality dividend growth stocks take it to the next level, as they’ve been paying increasing dividends for decades.

Investing in high-quality dividend growth stocks for myself allowed me to retire in my early 30s. And I lay out in my Early Retirement Blueprint exactly accomplish that. Suffice it to say, a lot of saving and investing was involved. By putting my hard-earned savings to work with high-quality dividend growth stocks, I built my FIRE Fund.

That’s my real-money dividend growth stock portfolio, which produces, the five-figure dividend income I live off of. But I didn’t just invest in any dividend growth stocks. I invested in the highest-quality dividend growth stocks at the best possible valuations.

Price is what you pay. But it’s value that you get for your money. 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 the higher yield.

But capital gain is also given a possible boost via the “upside” between a lower price paid and a 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.

Buying the highest-quality dividend growth stocks at the lowest possible valuations almost guarantees you life-changing wealth and passive income over the long term. And the good news is that finding those stocks isn’t all that difficult. The valuation part of the equation has been made a lot easier with Lesson 11: Valuation.

Penned by my colleague Dave Van Knapp, it lays out a valuation template that you can apply to almost any dividend growth stock out there.

Gilead Sciences, Inc. (GILD) is a biopharmaceutical company that develops and markets therapies to treat a variety of life-threatening diseases.

Founded in 1987, Gilead is now a $84 billion (by market cap) global drug giant that employs more than 13,000 people.

The company’s three primary disease areas are viral diseases, inflammatory diseases, and oncology. Gilead specifically focuses on HIV and hepatitis B and C.

Their HIV franchise accounted for approximately 70% of FY 2020 sales. Biktarvy, which treats HIV, is their most important drug, making up about 29% of total FY 2020 sales.

Morningstar rates GILD as a 4-star stock, with a fair value estimate of $81.00.

CFRA rates GILD as a 3-star “HOLD”, with a 12-month target price of $66.00.

I came out right in the middle this time. Averaging the three numbers out gives us a final valuation of $73.85, which would indicate the stock is possibly 10% undervalued.

Bottom line: Gilead Sciences, Inc. (GILD) is a high-quality biopharmaceutical firm benefiting from the demographic tide lifting all boats. Growth is back on the upswing and expectations are low. With a market-beating 4%+ yield, inflation-beating dividend growth, a low payout ratio, and the potential that shares are 10% undervalued, this is an attractive long-term idea in an otherwise expensive stock market.

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