There is a fast lane to find the best dividend growth stocks

 

If you have been following The Dividend Guy Blog for a while, you already know that chasing high dividend yield stocks or picking in only one sector won’t do it if you want to build a strong dividend growth portfolio. There is only one way to build such a portfolio and it’s to pick among the best dividend growth stocks. I’m not the kind of investor who’s looking for a fast lane to pick-up “hot stocks” but I found a way to “secure” your dividend stock picking process.

 

But first, here’s some information for those who think that we have entered into a dividend bubble.

 

Is It The Time To Invest In Dividend Growth Stocks?

 

There is a rumor in the trading industry that says that we have entered in a dividend stock bubble. The rumor states that dividend stocks are mainly bought by investors seeking for a steady yield. When you look at the overall S&P 500 dividend yield vs the 10 yr Treasury Bond yield, you can understand why:

 

S&P500 dividend yield vs 10 yr treasury yield

 

Since 2011, the S&P 500 dividend yield is paying more than the 10 yr bill! This simply means that you can’t find a good yield in bonds, certificates of deposit or treasury bills. Buying solid dividend growth stocks seems quite attractive as you can easily earn a 3% dividend + hope to see your stock value grow over time.

 

This is why investors, portfolio managers and even ETFs have poured their assets massively into dividend growth stocks. The first money movement was targeted on high dividend yield stocks. If there is a bubble growing, it is probably that part of the dividend stocks you want to avoid; stocks with dividend yield over 4.50% may be too pricey for the moment. However, it doesn’t mean that the whole market is expensive.

 

In fact, the average P/E ratio for dividend stocks is around 17 right now. Historically, these same stocks were sold at 20. This tells me that they are still trading at a discount. To be honest, I still believe the overall US market is trading at a discount right now, so this is in line with my own theory. On the other hand, a high dividend yield sector such as Utilities currently shows a P/E ratio around 28. It’s useless to say that you are now paying a high premium to earn dividend payouts from this sector! Industrial and Financial sectors seems to be the best bets for undervalued stocks vs dividend yield at the moment.

 

Coming to the Ultimate Tip to Find the Best Dividend Growth Stocks

 

The reason why I’ve made such a long intro wasn’t to plug a nice graph and tell you that dividend stocks are cheap right now. It’s also not to show you that dividend growth stocks are better than the average stock market (you know that already, don’t you?). I wanted to make a point; the point is that everything is pointing towards dividend investing.

 

While dividend investing has always been somewhat popular, I think it’s earning a new edge due to the super low interest environment we are in. There are no other choices for retirees but to take a leap of faith and invest a part of their money into dividend growth stocks. But this is darn scary for anyone who has never really played the stock market before. And what do people do when they feel uncomfortable about something? They turn towards professional help. This is why mutual funds and ETF portfolio managers smelled the money from profits and boosted their dividend investing product offerings. If you have little to no experience in buying stocks, the smart and logical things to do will be to invest in a diversified and professionally managed investment product. This is why dividend mutual funds and dividend ETFs grew like wheat in Central Canada for the past five years. Here are a few of the most popular dividend ETFs:

 

 
Objective
Stock Selection Process
Avg Yield
Market Cap ($B)
VIGDiv GrowthDividend increase each year for the past 10 years + payout ratio requirements.2.10%10.18
SDYDiv GrowthMust be part of S&P 500 composite 1500 and show dividend increase for 20 consecutive years.3.10%9.49
DVYDiv Growth5 year dividend growth rate must be positive + dividend payout ratio under 60%.3.50%10.87
VYMHigh YieldAim for high dividend yield stocks excluding REITs.2.90%4.23
HDVHigh Yield75 high dividend yield stocks screened through by several metrics to forecast business sustainability3.20%2.27

 

As you can see, I posted 3 dividend growth and 2 high dividend yield oriented ETFs. The most important column in this chart is the last one: the market cap. Solely within these 5 dividend ETFs, there are $37 billion invested. This tells you one thing: Dividend ETFs are boosting several dividend growth stock values on the market.

 

Check Out the Top Holding Dividend ETFs

 

By selecting stocks from top holding ETFs, you gain a lot of benefits:

 

#1 You buy a stock that has been professionally selected by most dividend portfolio managers (reducing your potential trading losses)

#2 You make sure that there is some kind of value support on your stocks (as most investors will reinvest their ETF’s dividends back into the ETF itself which will buy more of these stocks)

#3 You make sure that there is a potential for growth in the value of your stocks (as most investors are turning towards dividend investing, this should increase the demand for dividend growth stocks)

 

I’ve looked at some of the biggest dividend ETFs and here’s a short list of top dividend growth stock holdings currently held (in alphabetical order)

 

Top Dividend Growth Stocks Held In Dividend ETFs

 

 

Ticker
Name
Div Yield
CLColgate-Palmolive2.36%
CVXChevron Corp3.32%
EMREmerson Electric3.21%
GDGeneral Dynamics2.96%
IBMInternational Business Machines1.76%
JNJJohnson & Johnson3.44%
KMBKimberly-Clark3.55%
KOCoca-Cola2.75%
MCDMcDonald\'s3.55%
MDTMedtronic2.48%
MMM3M Co2.65%
MRKMerck & Co3.65%
PEPPepsiCo3.11%
PFEPfizer3.58%
PGProcter & Gamble3.25%
PPGPPG Industries1.97%
TAT&T inc5.04%
UTXUnited Technologies2.74%
WMTWal-Mart2.18%
XOMExxon Mobil Corp2.53%

 

I was happy to find 3 of my own stocks on this list (KO, CVX and JNJ). You can also read my stock analyses for the following companies:

 

Colgate-Palmolive (CL)

Chevron Corp (CVX)

Kimberly-Clark (KMB)

Johnson & Johnson (JNJ)

Coca-Cola (KO)

McDonald’s (MCD)

PepsiCo (PEP)

Procter & Gamble (PG)

AT&T inc (T)

 

There are a lot of dividend growth stocks from the consumer sector in this list. This is a great way to build your core dividend growth portfolio. However, keep in mind that since they are “popular stocks”, they may be trading at a higher P/E ratio. Therefore, you buy these stocks for their dividend growth potential but forget about a surge in the stock value!

 

Warning: I’m not telling you that blindly buying the top holdings of any ETF will work. In fact, you can simply buy the dividend ETF instead and save on trading fees. But if you apply your own stock screening process and find similar stocks amongst the top holdings in dividend ETFs, you have a good indication that these stock values will be supported for a long time.

 

 

You Want More Tricks To Buy Dividend Growth Stocks?

 

If you are looking to:

Save Time

Make Money With Dividend Stocks

Avoid Tax Traps

 

Check out my book, there is a ton of insightful info on how to buy, manage and sell your dividend stocks!

 

Dividend Growth eBook

 

 

DOWNLOAD YOUR COPY NOW

 

 

 

 

 

 

 

 

 

 

 

 

 

 

disclaimer: I own shares of KO, CVX, JNJ

Start Dividend Investing
Subscribe to our exclusive Dividend Mailing List and download your free Dividend Investing Guide
We hate spam just as much as you & will respect your privacy


You are interested in dividend investing? Check out my Free Dividend Investing eBook and don't forget to sign-up to my RSS Feeds!
7 Comments   |  

7 Comments

Michel
November 5, 2012, 6:54 am

Good post Mike. Will you the same analysis with cdn stocks and ETF’s? Thanks.

Mike
November 5, 2012, 7:00 am

Good point Michel, I’ll keep a note of that and try to get the information!

November 5, 2012, 7:28 pm

Great post. Exactly my strategy :)

Got 7 stocks in the list above….confirming the thesis!

I will tweet and promote in my Weekend Reading roundup this week.

Cheers,
Mark

November 8, 2012, 9:20 pm

[…] Dividend Guy Blog wrote about a smart investing tip to determine the best dividend growth stocks to own.  As part of his post, he definitely read my mind:  “check out the top holdings in dividend […]

November 10, 2012, 2:56 am

[…] Find the Best Dividend Growth Stocks @ The Dividend Guy […]

November 19, 2012, 8:11 am

[…] the past two weeks, I’ve been looking at the top dividend growth US stocks and the top dividend growth Canadian stocks held in the biggest dividend ETFs in terms of market […]

peter campbell
November 23, 2012, 10:10 am

Mike ,Great source of dividend material.Just surprised you didn’t specify dividend pay out ratio metric unless that is included in the business sustainability metric.I look forwar to your new book in Jan?
Regards
Peter

Post Comments

Notify me of followup comments via email