At any given time, investors have so many choices. There are literally thousands of stocks that constitute the US stock market. So how does one intelligently narrow down the choices? Well, I’d argue there are two huge factors to consider.

The first factor is quality. And when I think of quality, my mind immediately goes to high-quality dividend growth stocks. These are stocks that represent equity in world-class businesses that pay reliable, rising dividends to shareholders. By their very nature, these are some of the best stocks in the market. That’s because only truly great businesses can reliably produce the growing profit necessary to sustain ever-higher dividends for decades on end. You can find hundreds of these stocks on the Dividend Champions, Contenders, and Challengers list.

As you can see, we’ve already narrowed things down from thousands to hundreds of stocks. I’ve personally invested in high-quality dividend growth stocks over the last decade. Doing so allowed me to build out my FIRE Fund. That’s my real-money portfolio, which produces enough five-figure passive dividend income to live off of. Indeed, I no longer need a day job to pay the bills. Investing in these stocks helped me to retire in my early 30s. I explain exactly how I achieved this feat in my Early Retirement Blueprint. So if quality is the first factor, what’s the second? That would be valuation.

While price is what you pay, value is 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.

Combining high-quality dividend growth stocks with undervaluation is a nearly unbeatable way to generate significant wealth and passive income over the long term. Fortunately, identifying and properly applying these two factors isn’t as difficult as it might seem.

Fellow contributor Dave Van Knapp has greatly simplified one of them for you with Lesson 11: Valuation. Part of an overarching series of “lessons” on dividend growth investing, it clearly spells out how to value just about any dividend growth stock out there.

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