My Top 15 High Growth Dividend Stocks For October 2022

My Top 15 High Growth Dividend Stocks For October 2022


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Quality Stocks

In the last week of August, investors may have been disappointed following a pullback in the market, but those losses now seem minor compared to how September has played out. Month after month the stock market seems to drop more this year with no end in sight. On a positive note, dividend yields are getting more attractive and the impact of dividend reinvestment is becoming more significant. So, don’t dwell on what has already happened, instead focus on the opportunity today and position yourself for success in the future.

My watchlist for September lost 7.90%, outperforming Vanguard’s Dividend Appreciation ETF (VIG) that lost 8.18% and the SPDR S&P 500 Trust ETF (SPY) that lost 9.24%. Annualized alpha over VIG drops from 2.87% to 2.79%, and annualized alpha over SPY increases from 3.27% to 3.74%. Even though the watchlist performed better than VIG in September, when it saw some of its annualized alpha erased, this is purely a result of how performance is measured. The impact of a loss will be greater on a higher total return than a smaller one. Following the poor results in September, the long-term annualized rate of return for the watchlist fell further below my target of 12% (6.45%). The best thing to do after a losing month is to shake off the dust and start identifying new opportunities.

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

The top 15 dividend growth stocks for October offer an average dividend yield of 2.27%. Collectively, they have increased dividend payments at a rate of 29.38% during the last 5 years. Based on dividend yield theory, these 15 stocks are about 40% undervalued right now, and I think they are poised to offer strong long-term returns.

I would recommend two approaches to dividend investing. The first is to dollar-cost average into at least 10-20 or more quality dividend-paying stocks across multiple sectors and industries. By dollar-cost averaging, you eliminate the risk of trying to value a stock and over a long enough period, theoretically, you will buy shares at market highs, lows, and in-between resulting in an average cost basis somewhere in the middle. The second method carries a little more risk. Invest in undervalued stocks, also dollar-cost averaging into at least 10-20 unique quality companies across multiple sectors and industries. The additional risk with this approach comes from the chance that your valuation method proves to be incorrect. However, by investing in multiple unique stocks, the odds that you accurately identify at least a few undervalued stocks increases. The resulting upside from a few correct picks may more than offset the underperformance from the bad ones.

Watchlist Criteria

The criteria used to determine which stocks are included in my high-growth dividend stock watchlist remains unchanged for October 2022. It is made up of the 8 factors listed below that have historically outperformed the broad universe of dividend-paying stocks when analyzed collectively.

  • Market Cap of at least $10 billion
  • Payout Ratio no greater than 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 Dividend Rating of B+ or better
  • Wide or Narrow Moat (Morningstar)
  • Exemplary or Standard Management Team (Morningstar)

The rules identified 109 stocks for the month of October that were all ranked based on the above-mentioned metrics with the exclusion of market cap. I then computed the current valuation for each stock using dividend yield theory. All stocks were ranked for both quality and valuation and sorted by the best combination of both. Next, I computed a forecasted rate of return for the next 5-year period for each of the stocks. This return is based on forecasted earnings growth, a return to fair value and the dividend yield.

The highest ranked 15 stocks with a forecasted return greater than or equal to 12% were chosen for the October watchlist. The long-term hypothesis for this watchlist is that it will outperform a broad quality dividend fund such as Vanguard’s Dividend Appreciation ETF, VIG.

Watchlist For October 2022

Top 15 High Growth Dividend Stocks October 2022

Created by Author

Above are the 15 stocks I am considering for further evaluation during the month. They are sorted in descending order by their rank and 5-year dividend growth rate.

The “O/U” column represents potential undervalue; this is a comparison of the current dividend yield to the historical dividend yield as a function of share price. Collectively these 15 stocks offer a dividend yield of 2.27%.

The expected return in the table above was computed using a discounted 5-year EPS forecast, a return to fair value and the current dividend yield. There is also a margin of safety built into the forecasted return. These figures are just assumptions based on the available data and there is no guarantee these returns will be attained.

The large potential undervaluation for Cigna (CI) is overstated due to very fast recent dividend growth by the company. Dividend yield theory works best for companies with stable and consistent dividend growth.

There are two changes to the top 15 list from the prior month. Advance Auto Parts (AAP) and MSCI (MSCI) fall further down the list and replacing them in the top 15 are Intercontinental Exchange (ICE) and Lam Research (LRCX).

Past Performance

September had the worst single month return since I started tracking this watchlist 25 months ago, the prior worst return was minus 6.45% in June of this year. On a year-to-date basis the watchlist remains ahead of both VIG, with 0.45% of alpha, and SPY, with 4.19% of alpha. The long term annualized rate of return for the watchlist falls from 11.21% last month to 6.45% after September. My target rate of return is 12%, and despite the volatility in the market this year I remain optimistic this watchlist will meet this goal in the long run.

Month

Watchlist

All

VIG

SPY

1 Month

-7.90%

-9.14%

-8.18%

-9.24%

3 Month

-5.09%

-5.38%

-5.32%

-4.93%

6 Month

-13.61%

-18.17%

-15.82%

-20.24%

1 Year

-8.13%

-14.78%

-10.33%

-15.49%

2020

6.27%

6.15%

9.09%

7.94%

2021

33.53%

31.55%

23.75%

28.76%

2022

-19.73%

-24.11%

-20.18%

-23.92%

Since Inception

13.90%

5.97%

7.77%

5.73%

Annualized

6.45%

2.82%

3.66%

2.71%

Top 5 past and present watchlist stocks in September 2022:

  • Rollins (ROL) +2.73%
  • Charles Schwab (SCHW) +1.30%
  • Dollar General (DG) +1.03%
  • Humana (HUM) +0.87%
  • Tractor Supply (TSCO) +0.39%

Only one out of the top 5 watchlist stocks from September was part of my watchlist; TSCO. In total there have been 66 unique dividend stocks selected by this watchlist since September of 2020.

Top 5 Stocks by Total Return since joining the watchlist:

  1. Automatic Data Processing (ADP) +70.09% (25 months)
  2. UnitedHealth Group (UNH) +55.04% (20 months)
  3. Charles Schwab (SCHW) +42.08% (20 months) NEW
  4. Northrop Grumman (NOC) +41.38% (25 months)
  5. Progressive (PGR) +36.05% (20 months)

ADP remains the best watchlist stock despite losing 7.06% in September. UNH posted a loss of 2.45% last month but retains the 2nd position. SCHW with a modest gain in September jumps back onto the top 5 list, climbing all the was to 3rd best overall. NOC lost 1.6% and slides down into fourth place. PGR sheds 5.25% but holds onto 5th overall place.

Since not all stocks have been on the watchlist for the full 25 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. Cigna (CI) +2.42% (7 months)
  2. UnitedHealth Group (UNH) +2.22% (20 months)
  3. Automatic Data Processing (ADP) +2.15% (25 months)
  4. Charles Schwab (SCHW) +1.77% (20 months)
  5. Rollins (ROL) +1.59% (8 months)

Drivers Of Alpha

The watchlist outperformed VIG in September. 8 watchlist stocks outpaced the ETF last month.

The remaining 7 stocks underperformed VIG.

Buy-And-Hold Portfolios

The best way to utilize the ideas presented by this watchlist is with a long term buy-and-hold investing approach. I started tracking how such a portfolio would have worked out with one portfolio started at the beginning of 2021 and the other at the beginning of 2022. Each portfolio assumes you invest equally amongst the chosen 15 stocks for the given month and never liquidate these positions.

The 2021 B&H portfolio performed okay in September, losing 6.99% and outperforming SPY and VIG. The cumulative return since January 2021 for the portfolio is 3.54% compared to minus 1.22% for VIG and minus 2,04% for SPY. On an annualized basis the portfolio has a 2.01% return compared to minus 0.70% for VIG and minus 1.17% for SPY. The portfolio holds 54 unique positions with the largest position being:

  1. (SCHW) 6.07% (allocation)
  2. (LOW) 6.04%
  3. (HD) 5.58%
  4. (TSCO) 5.32%
  5. (UNH) 5.03%

Here are the 5 best performing positions:

  1. (NOC) +50.36%
  2. (PGR) +37.03%
  3. (UNH) +30.64%
  4. (FDS) +22.19%
  5. (JKHY) +17.28%

The 2022 B&H portfolio performed worse in September, losing 7.60%. The year-to-date return is -22.37% compared to -20.18% for VIG and -23.92% for SPY. There are a total of 38 unique positions in the portfolio due to a high turnover rate on the watchlist because of all the market volatility.

Here are the 5 largest positions:

  1. (CI) 6.44% (allocation)
  2. (TSCO) 6.34%
  3. (HD) 6.23%
  4. (LOW) 5.50%
  5. (SCHW) 4.85%

Here are the 5 best performing positions:

  1. (ROL) +13.43%
  2. (ATVI) +12.38%
  3. (HUM) +12.08%
  4. (CI) +8.24%
  5. (CTAS) -0.08%

My expectations are for this watchlist to produce a long term 12% annualized rate of return. I use this watchlist along with my high yield watchlist to identify investing opportunities that I act on in my personal portfolio.



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October 4, 2022 / Markets / Tags: , , , , ,

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