This is the fourth of a five-part series presenting 50 dividend growth stocks that I have screened for current fair value. With this article, I will be covering 10 additional dividend growth research candidates with moderate to higher yields in addition to the initial 30 that I presented in part 1 found here, part 2 found here and part 3 found here.
The first 3 parts of this 5-part series presented high to moderate yielding attractively valued dividend growth stocks. With this part 4 most of the candidates are more oriented to dividend growth investor’s seeking a higher total return. To be clear, most of the research candidates in this group might appeal to investors who are still a few or more years away from retirement. Although dividends are still important to this investor type, portfolio and dividend income growth are more pertinent than a high current yield.
The primary focus on this series of articles is on attractive valuation. Regardless of whether you are investing for growth, current income or income growth, valuation is a universal principle that should be applied with discipline and prudence. However, being disciplined to only invest at fair valuation is more about prudence and controlling risk than it is about generating the highest possible return. Nevertheless, I believe all successful investment strategies should start with the primary focus on identifying fair or intrinsic value.
Furthermore, one misconception that I come across repeatedly is the idea that if the company’s growth rate increases, then so should its fair value multiple. In other words, when a company begins to grow a little faster, it suggests to many investors that it then should automatically command a higher P/E ratio. In my experience, that is not always true. To command a higher valuation than the average company, the company needs to be growing earnings and/or cash flows at a rate greater than 15% per annum. Otherwise, for most companies growing at lower rates, a P/E ratio of 15 universally applies.
The math supporting this above statement is founded on the concept of earnings yield – which is simply the inverse of the P/E ratio. A P/E ratio of 15 provides an earnings yield of 6.67%. In simple terms, this means that if you were entitled to receive all the earnings of the company (you were a 100% shareholder) your return would be 6.67%. This is in line with the long-term return that stocks in the general sense have delivered to shareholders. In my mind, this is a minimum earnings yield that I am willing to accept before I invest in any company.
Later when reviewing the portfolio review listing the 10 stocks in this article, you will see that all but 3 (Comcast Corporation, TFI International and RPM International Inc.) currently provide an earnings yield greater than 6.67%. Regarding the 3 that do not offer an earnings yield over 6.67%, this simply suggests that investors might be wise to patiently wait for a better valuation. Nevertheless, you might also notice that each of them currently trades at a blended P/E ratio greater than 15.