How about we help you narrow your research and focus on high-quality stocks? The Dividend Rock Star lists companies with solid metrics and robust business models. These qualities make them among the safest dividend stocks.
Which dividend stocks are the best? Those with the highest yield? Or those with the strongest dividend growth? I present you with the Dividend Rock Stars list: a selection of companies showing both income and growth. You guessed it; we prefer a combination of dividend growth and dividend yield. Here’s why…
Dividend Growth Investing = Safe Investing with More Money, Less Stress
“When you have confidence, you can have a lot of fun. And when you have fun, you can do amazing things.”
~Joe Namath
My entire portfolio is invested in dividend growth stocks. Some holdings act as “fixed income” as they offer a stable dividend yield and can weather market storms. Some others are my “growth equity” as they offer lower yield, but strong dividend growth and stock price appreciation potential. The combination of various dividend growers will create a balance where your portfolio will help you retire stress-free.
Strangely enough, even Vanguard (a pioneer in ETF investing) conducted its own studies on the recent market history and concluded that dividend growers are among the best-performing assets.
According to Vanguard’s study over this 20-year period, dividend growth stocks not only beat the market, but they did it with less volatility. While dividend growers usually provide investors with less volatility, you will still go through challenging periods where your favorite holdings will show red numbers. This is where you may start losing confidence and start wondering if it would be appropriate to cash your profits and protect your capital.
How the Rock Stars List Has been Built?
This dividend stocks list has been created with the help of our investment membership; Dividend Stocks Rock. When my family and I left in our small RV to drive down to Costa Rica, we lived the adventure of a lifetime. It was a wonderful experience because we had a clear strategy. We knew where we were going, why we were doing it and we even had ways to handle more difficult days. The market will keep throwing you curveballs, so let’s make sure you don’t whiff on them.
At Dividend Stocks Rock, we also have a clear strategy: we focus on dividend growth stocks. We handpick companies showing a strong dividend triangle (e.g. revenue, earnings, and dividend growth potential) and make sure we understand their business model. It is sometimes frustrating to follow such a clear, but strict strategy. We sometimes must ignore great investing opportunities because they don’t fit in our model. Since our model is quite easy to understand and we know why we are using it, we never doubt ourselves.
We have created the Rock Stars list based on the combination of three metrics creating the dividend triangle. It’s a stronger list compared to the dividend aristocrats as we combine various metrics on top of dividend growth. By filtering the market to find stocks showing growing sales, growing earnings and growing dividends, we are convinced we can pick among the best dividend stocks, period. Enter your email below to get the list for free.
If you’re still unsure about what’s a Dividend Rock Star, here’s a podcast episode to help your understanding.
The Dividend Triangle is key to identifying safe stocks
With a smart combination of three metrics, you’ll be able to pick the best stocks from our list. You can quickly identify safe investments using the dividend triangle:
Revenues
A business is not a business without revenues. What is the difference between a company with growing revenues versus a company showing stagnating results? We are looking for companies with several growth vectors that will ensure consistent sales increases year after year. I’m a big believer in “offense is the best defense”. Whenever we are about to face a recession, I want to make sure I have companies that have shown past revenue growth. This is an excellent indicator that their business model is doing well, and they won’t enter a recession in a position of weakness.
Earnings
You cannot pay dividends if you don’t earn money. Then again, this is a very simple statement. Still, if earnings don’t grow strongly, there is no point of thinking that the dividend payment will increase indefinitely. Keep in mind that the EPS is based on a GAAP calculation. This is what makes EPS imperfect, as accounting principles are not aligned with cash flow. This means you are better off looking at the EPS trend over 3, 5, and 10 years. Use an adjusted EPS that discounts those one-time events revealed by the company to have a clear view of what is happening. Some companies could “play around” with earnings for a year or two, but you can’t create a trend out of thin air.
Dividends
Finally, dividend payments are the *obvious* backbone of any dividend growth investing strategy. But I don’t focus on the real dollar amounts or the yields because our real focus is solely on dividend growth. Dividend growers show confidence in their business model. This is a statement claiming that the company has enough money to both grow their business and reward shareholders at the same time. This also tells you that the business can pay off its financial obligations and invest in new projects (CAPEX). No management team will increase their dividend if they lack the cash to run their business.
What does a Strong Dividend Triangle Look Like?
It’s one thing to put those metrics into a stock screener, but it’s another to know what to do with them. The problem I face with a simple stock screener is that it will give me the 3year or 5year annualized growth, but I can’t see the trend.
Once I identify a company with a strong dividend triangle, my second step will be to look at the trend over the past 5 years for each metric. This period is long enough to show the current trend and highlight some jumps or drops that I must investigate. For example, I’ve pulled the dividend triangle of one my favorite stocks: National Bank:
As you can see, revenue, earnings, and dividend follow a similar trend. There was a decrease in earnings during the pandemic which led to a pause (forced by regulators) of dividend growth. Now that the pandemic is behind us, National Bank is back on the Rock Stars list with a strong dividend growth potential.
Dividend Stocks List Metrics
The Dividend Rock Stars list is comprised of only stocks that show a minimum revenue and earnings growth of 1% for the past five years. We could have asked for higher requirements, but considering the pandemic, we wanted to make sure we capture all dividend growers that deserve to be a Rock Star. While we didn’t include a minimum yield (dividend yield on this list goes from 0.29% all the way up to 15%), we required a minimum dividend growth rate of 5%. As you know, dividend growth = more money and less stress.
Building a list with only three metrics would not give you enough information for your research. For this reason, the Dividend Rock Stars list includes around 40 financial metrics. You can then use the filter you want to identify the perfect stock for your portfolio. The Rock Stars list also includes some of Refinitiv Starmine scores:
StarMine Credit Score
The current regional 1-100 percentile rank of a company’s 1-year default probability is based on the StarMine Combined Credit Risk Model. The Combined Model blends the Structural, SmartRatios, and Text Mining Credit Risk models into one final estimate of credit risk at the company level. Higher scores indicate companies that are less likely to go bankrupt, or default on their debt obligations, within the next 1-year period.
The combined credit score includes metrics from three different models:
- Structural: Structural leverage, asset volatility, and asset drift.
- SmartRatios: profitability, leverage, coverage, liquidity, and growth & stability
- Text mining: transcripts, Reuters news, filings, research
As you can see, the credit score is a combination of the business finance structure, ratios, and how artificial intelligence analyzes the company’s news and transcripts. Pretty powerful metrics!
StarMine ESG Score
Refinitiv ESG Combined Score is an overall company score based on the reported information in the Environmental, Social, and Corporate Governance pillars (ESG Score) with an ESG Controversies overlay. The ESG score you find in the stock screener shows the combined scoring of the four factors mentioned above. Here is an example of how 3M (MMM) Controversies score has fallen because of their lawsuits in 2018-2019:
This scoring gives you a particularly good idea if the company is a good corporate citizen. Since MMM has a good reputation overall besides those legal incidents, the overall ESG score is positive:
The score you will find in the stock screener is rated from 1 (worst) to 100 (best).
StarMine Value Score
The current regional 1-100 percentile rank of the security is the overall Relative Value Model. Higher scores indicate stocks with the best value when considering all Relative Value model components that are relevant for the stock.
The relative valuation model will use a combination of 6 valuation metrics:
- EV/Sales
- EV/EBITDA
- P/E
- Price/Cash Flow
- Price/Book
- Dividend Yield
A Quick Note on Sector Allocation
The list also covers all sectors. Sector allocation is a key component in a sound investment strategy. But how many should an investor hold? And which ones?
Since I focus on total return and long-term growth, I will pick more companies in tech, industrials and consumer discretionary sectors. If you are looking to generate income, Health Care, Utilities, Communication Services and Financials (along with REITs) would possibly be better options.
You can find more information about sector allocation here.
Download the Dividend Rock Stars List
This dividend stocks list is updated monthly. By subscribing to our newsletter, you will receive the updated version of the Rock Stars list monthly. You can download the list by entering your email below.
My Top 2 Dividend Rock Stars
If I had to list all the dividend rock stars in my portfolio, this article would be too long. Therefore, I decided to share with you 2 of my favorites.
Apple (AAPL)
There is continued interest among consumers in premium products. AAPL’s first growth vector remains its iPhone. It also sees double-digit growth in its Services division, which generates higher margins; services such as Apple Pay, Apple Music and Apple TV represent just the tip of the iceberg. The company reported record sales ($20B+) for this segment in Q1 2023.
As more iPhones are purchased, their users are inclined to purchase the services related to them. The company recently reported it crossed the 2B active devices mark in early 2023. Apple’s iPhones and IOS are beloved by customers and are a symbol of stability and security in terms of technology. Management has become increasingly shareholder-friendly, as evidenced by strong dividend growth and massive share buybacks. AAPL is among the rare companies that don’t need to be first movers in a new market. It has the cash flow and expertise to develop products and gain market shares once the market is developed (think of the Apple Watch’s success).
Alimentation Couche-Tard (ATD.TO)
In the long term, dividend payouts should grow in the double digits, and investors should see strong stock price growth. ATD’s potential is directly linked to its capacity to acquire and integrate additional convenience stores. Management has proven its ability to pay the right price and generate synergies for each acquisition. ATD exhibits a solid combination of the dividend triangle: revenue, EPS, and strong dividend growth. The company counts on multiple organic growth vectors such as Fresh Food Fast, pricing & promotion, assortment, cost optimization and network development. In their latest quarter, ATD also announced the firm’s offer to acquire 2,193 stores from TotalEnergies for €3.1B (100% of retail assets in Germany and the Netherlands as well as a 60% controlling interest in the Belgium and Luxembourg entities). This will significantly expand its exposure to the European market and grow its total convenience stores above 16,000 across the world.
Metrics are Not Everything
I can’t stress enough the importance of not depending on a single or a few metrics to invest in a company. I don’t believe there are 300+ amazing companies you should buy. The Dividend Rock Star List is a very good start, but further analysis is mandatory before deciding to buy or sell.
Let me know if this list is helpful and how I can improve it for your effective use!
Disclaimer: I hold AAPL, ATD.TO, CNR.TO in my DSR portfolios.
