My 15 High Growth Dividend Stocks for September 2022

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Quality stocks

If we had only ended the month a week earlier, August’s story would have been much different. But in the market, you have to take the hits as they come. As a long-term dividend investor, market weakness should be seen as an opportunity rather than a punishment.

My watchlist for August lost 4.88%, underperforming Vanguard’s Dividend Appreciation ETF (VIG) which lost 3.45% and the SPDR S&P 500 Trust (SPY) ETF which lost 4.08%. Since its inception in September 2020, the watchlist has always generated alpha on both benchmarks, but the gap narrowed after August. The annualized alpha on VIG goes from 3.96% to 2.87%, and the annualized alpha on SPY goes from 4.01% to 3.27%. Following the weak August results, the watchlist’s long-term annualized rate of return falls below my target of 12% (11.21%). The best thing to do after a losing month is to shake off the dust and start identifying the biggest opportunities.

The main objective of this watchlist is to find the best combination of quality companies trading at attractive prices. I believe this is the optimal long-term strategy for building wealth.

The top 15 dividend growth stocks for September offer an average dividend yield of 2.17%. Collectively they have increased dividend payments at a rate of 32.43% over the past 5 years. Based on dividend yield theory, these 15 stocks are currently undervalued by about 39%, and I believe they are poised to deliver strong long-term returns.

I would recommend two approaches to investing in dividends. The first is to calculate the average cost of at least 10-20 or more dividend-paying quality stocks across multiple sectors and industries. By averaging the dollar cost you take the risk out of trying to price a stock and over a long enough period of time you will theoretically buy stocks at the highs, lows and in between, resulting in a average cost base somewhere in the middle. The second method carries a little more risk. Invest in undervalued stocks and average the dollar cost of at least 10-20 unique quality companies across multiple sectors and industries. The additional risk with this approach comes from the possibility that your valuation method turns out to be incorrect. However, by investing in several unique stocks, the chances that you will accurately identify at least a few undervalued stocks increase. The benefit from a few correct picks can more than offset the underperformance of the wrong ones.

Watchlist Criteria

The criteria used to determine which stocks are included in my High Growth Dividend Stock Watchlist remain unchanged for September 2022. It is comprised of the 8 factors listed below that have historically outperformed the broad universe of dividend paying stocks when are analyzed collectively.

  • Market capitalization of at least $10 billion
  • Distribution rate not exceeding 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 dividends rated B+ or better
  • Wide or Narrow Ditch (Morningstar)
  • Exemplary or standard management team (Morningstar)

The rules identified 112 stocks for the month of September which were all ranked based on the aforementioned metrics excluding market capitalization. I then calculated the current valuation of each stock using dividend yield theory. All stocks have been ranked according to their quality and valuation and sorted according to the best combination of the two. Then I calculated an expected rate of return for the next 5 year period for each of the stocks. This return is based on expected earnings growth, a return to fair value and dividend yield.

The top 15 ranked stocks with an expected return greater than or equal to 12% were chosen for the September Watch List. The long-term assumption of this watchlist is that it will outperform a broad, quality dividend fund such as Vanguard’s Dividend Appreciation ETF, VIG.

Watchlist for September 2022

Top 15 High Growth Dividend Stocks for September 2022

Created by author

Above are the 15 stocks I plan to evaluate further in the month. They are ranked in descending order according to their rank and the growth rate of the dividend over 5 years.

The “O/U” column represents a potential undervaluation; it is a comparison of the current dividend yield to the historic dividend yield based on the share price. Together, these 15 stocks offer a dividend yield of 2.17%.

The expected yield in the table above was calculated using an updated 5-year EPS forecast, fair value return and current dividend yield. There is also a safety margin built into the expected return. These figures are only assumptions based on available data and there is no guarantee that these returns will be achieved.

The large potential undervaluations of Cigna (CI) and Advance Auto Parts (AAP) are overstated due to the recent very rapid dividend growth of both companies. Dividend yield theory works best for companies with stable and consistent dividend growth.

There are two changes to the top 15 list from the previous month. Blackstone (BX) and Charles Schwab (SCHW) drop further down the list and replace them in the top 15 with Mastercard (MA) and Visa (V).

Past performance

August was the 5th month this year that watchlist underperformed VIG and the 4th underperforming month for SPY. Year-to-date, the watchlist is still ahead of both benchmarks, with 0.21% alpha on VIG and 3.32% alpha on SPY. The watchlist’s long-term annualized rate of return rises from 14.68% last month to 11.21% after August. My target rate of return is 12%, and despite market volatility this year, I remain optimistic that this watchlist will achieve that long-term goal.

Month

Watchlist

All

VIG

TO SPY

1 month

-4.88%

-4.56%

-3.45%

-4.08%

3 months

-3.60%

-3.68%

-3.31%

-3.89%

6 months

-4.12%

-7.52%

-5.55%

-8.82%

1 year

-4.38%

-10.51%

-7.22%

-11.23%

2020

6.27%

6.15%

9.09%

7.94%

2021

33.53%

31.55%

23.75%

28.76%

2022

-12.85%

-16.48%

-13.06%

-16.17%

Since the creation

23.67%

16.63%

17.37%

16.50%

annualized

11.21%

8.00%

8.34%

7.93%

Top 5 past and present watchlist stocks in August 2022:

  • Progressive (PGR) +6.60%
  • Deere Co. (DE) +6.43%
  • Charles Schwab (SCW) +3.06%
  • Cigna (IC) +2.94%
  • TJX Companies (TJX) +2.42%

Two of the top 5 August watchlist stocks were on my watchlist; SCHW and CI. Despite picking 2 of the top 5 Watchlist stocks last month, overall the Watchlist performed poorly due to other picks, as you’ll see in the next section. A total of 65 single dividend stocks have been selected by this watchlist since September 2020.

Top 5 stocks by total return since joining the Watchlist:

  1. Automatic Data Processing (ADP) +83.01% (24 months)
  2. UnitedHealth Group (UNH) +58.94% (19 months)
  3. Northrop Grumman (NOC) +43.68% (24 months)
  4. Progressive (PGR) +43.59% (19 months) NEW
  5. Costco (COST) +42.09% (24 months)

ADP remains the top stock on the watch list after adding 1.36% in August. UNH posted a loss of 4.24% last month but retains the 2nd position. NOC added 0.17% and slipped to third place. PGR, the best performing stock on the watchlist last month, climbs back into the top 5. Rounding out the top 5, COST lost 3.55% in August. CDW slips out of the top 5 after losing 5.71% last month.

Since not every stock has been on the Watch List for the full 24 months of its 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.

  1. Best Buy (BBY) +4.13% (2 months)
  2. Cigna (CI) +3.13% (6 months)
  3. Automatic Data Processing (ADP) +2.55% (24 months)
  4. UnitedHealth Group (UNH) +2.47% (19 months)
  5. Progressive (PGR) +1.92% (19 months)

Alpha Pilots

The watchlist underperformed VIG in August. 7 watchlist stocks outperformed the ETF last month.

  • (SCW) +3.06%
  • (CI) +2.94%
  • (LOW) +1.36%
  • (MS) +1.09%
  • (CMF) -2.72%
  • (TROW) -2.81%
  • (CST) -2.87%

The remaining 8 stocks underperformed VIG.

  • (HD) -3.53%
  • (DPZ) -5.16%
  • (SSNC) -5.43%
  • (MSCI) -6.44%
  • (BX) -7.97%
  • (BBY) -8.18%
  • (PAA) -12.90%
  • (BALL) -23.71%

Buy and hold portfolios

The best way to use the ideas presented by this watchlist is to take a long-term investing approach. I started tracking how such a portfolio would have worked with one portfolio started in early 2021 and the other in early 2022. Each portfolio assumes you are equally investing in the 15 stocks chosen for the given month and not liquidating never these positions.

The B&H 2021 portfolio performed poorly in August, losing 4.10% and slightly underperforming SPY and VIG. The cumulative return since January 2021 for the portfolio is 11.32% compared to 7.58% for VIG and 7.93% for SPY. On an annualized basis, the portfolio has a return of 6.65% compared to 4.48% for VIG and 4.69% for SPY. The portfolio holds 54 unique positions, with the largest position being:

  1. (SCHW) 5.86% (attribution)
  2. (LOW) 5.76%
  3. (HD) 5.36%
  4. (UNH) 5.05%
  5. (TSCO) 4.84%

Here are the top 5 positions:

  1. (NPC) +52.81%
  2. (RPG) +44.63%
  3. (UNH) +33.92%
  4. (DSF) +32.34%
  5. (LM) +24.76%

The B&H 2022 portfolio underperformed in August, losing 4.93%. The return since the beginning of the year is -15.96%, against -13.06% for VIG and -16.17% for SPY. There are a total of 38 unique positions in the portfolio due to high watchlist turnover due to all the volatility in the market.

Here are the 5 most important positions:

  1. (CI) 5.97% (distribution)
  2. (HD) 5.94%
  3. (TSCO) 5.72%
  4. (LOW) 5.06%
  5. (SCW) 5.01%

Here are the top 5 positions:

  1. (ATVI) +18.66%
  2. (CI) +11.84%
  3. (HUM) +11.11%
  4. (RL) +10.42%
  5. (MPWR) +7.45%

I expect this watchlist to produce a long-term annualized rate of return of 12%. I use this watchlist along with my High Yield Watchlist to identify investment opportunities I am acting on in my personal portfolio.

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