If you can’t beat ’em, join ’em.

There are massive tax changes that are afoot in the US right now.

And a lot of the overarching narratives that surround the debates regarding these tax changes charge the current administration with encouraging sweeping changes to the US tax law that will benefit the rich over the long run.

Maybe this is true. Maybe it’s not.

But if the former has any chance of being more correct than incorrect, is that necessarily a bad thing?

I don’t believe so.

It’s simply your opportunity to take advantage of it.

If I had spent energy complaining about the way capitalism potentially unevenly benefits the wealthy instead of using that energy to take advantage of capitalism and join those that are potentially unevenly benefited, I wouldn’t have reached financial independence at 33 years old.

The crazy thing about it is, it’s just not hard to take advantage of the system.

You simply have to make regular choices – choices like spending less and investing more – that will benefit yourself within that system and move you closer to those who benefit within the structure of capitalism.

Even very regular people can do this.

I speak from experience: I was unemployed and deeply in debt in the summer of 2009.

But I decided to turn it all around, make good choices moving forward, live below my means, and intelligently invest my excess capital.

By doing so, I built the bulk of the six-figure dividend growth stock portfolio I control today in about six years. I share all the details in my “blueprint” to early retirement.

This portfolio is generating the five-figure passive dividend income I need to pay my real-life bills without having to show up to a job every day. And this portfolio will very likely continue to benefit from capitalism for as long as I live.

I mentioned intelligent investing.

Well, in my view, there’s no long-term investing strategy more perfectly positioned to simultaneously benefit from capitalism and unlock financial independence for an investor than dividend growth investing.

That’s because these are global businesses that thrive as more people buy more products and/or services at higher prices, improving their profit and wherewithal to pay increasing dividends. And that wherewithal allows an investor to develop a fantastic source of increasing passive income that could be used to pay one’s bills, rendering them financially independent.

You can find more than 800 US-listed dividend growth stocks (800+ different possible long-term investment ideas) by looking over David Fish’s Dividend Champions, Contenders, and Challengers list, which has compiled invaluable data on all US-listed stocks that have paid increasing dividends to their shareholders for at least the last five consecutive years.

This investment strategy involves buying up shares in high-quality businesses that reward their shareholders with regularly increasing dividend payments, which themselves are funded by the regularly increasing profit these high-quality businesses are generating.

Oh, and one buys these shares when they’re undervalued.

See, price is what you pay. But value is what you’re getting for your money.

Price only tells you what something costs. But value will tell you what something is actually worth.

As such, knowing value is so much more important than knowing price.

This is true regardless of what it is you’re buying. But it’s perhaps never more true than when you’re buying dividend growth stocks.

That’s because an undervalued dividend growth stock should present a higher yield, larger total return potential, and less risk.

This is all relative to what the same stock might otherwise present the investor if it were fairly valued or overvalued.

And I’ll show you how that works.

Price and yield are inversely correlated; all else equal, a lower price will result in a higher yield. If a stock is deemed to be worth $50, it will certainly offer a much higher yield at $40 (i.e., when undervalued) versus $60 (i.e., when overvalued), all else equal.

This higher yield positively impacts total return right out of the gate, as income (via dividends or distributions) is one of two components (the other being capital gain) of total return.

Plus, the other component (capital gain) is given a major potential boost via the “upside” that exists between price and value when undervaluation is present.

If that same stock used as an example above is bought at $40, there’s $10 worth of “upside” that could be captured if/when the market more appropriately prices the stock.

That’s on top of whatever organic upside is available to the investor due to a business naturally becoming worth more as it sells more products and/or services and becomes worth more in the process.

Of course, this dynamic serves to benefit the investor in terms of risk, too.

After all, it should be fairly obvious that it’s less risky to pay $40 for a stock that’s estimated to be worth $50 than it would be to pay $60 for the same stock.

In the former scenario, you’re limiting your downside and investing less capital on a per-share basis. In the latter scenario, you’re doing exactly the opposite.

One might think it must be difficult to get their hands on the benefits that undervaluation can confer to the long-term investor, but that’s actually not necessarily the case.

Fellow contributor Dave Van Knapp actually showed prospective and current dividend growth investors how streamlined and straightforward the valuation process can be via his lesson on dividend growth stock valuation, which is part of an overarching and all-encompassing series of lessons on the dividend growth investing strategy.

And in order to show you readers what a high-quality dividend growth stock looks like when it’s undervalued, I’m going to breakdown and analyze one such stock right now…

Walt Disney Co. (DIS), together with its subsidiaries, operates as a global diversified media and entertainment conglomerate.

When I think of a high-quality business, one of the first things I like to look for is brand and pricing power.

Well, the Disney brand name is one of the strongest, most dominant, and most well-known out there.

One of the best things about this company, though, is that it’s so much more than just the Disney brand name.

That’s largely due to the massive transformations and acquisitions the company has taken on over time.

One might immediately think of theme parks when they think of Walt Disney, but the truth is that theme parks is actually just one aspect (about 30% of the company’s revenue) of what this company is and how it makes money.

While the theme park business is in and of itself pretty wonderful, Walt Disney is truly a media and entertainment giant that uses its brand name as a platform to cross-promote itself and deliver a customer experience unlike anything else I’ve ever seen in this space.

For example, you have the Media Networks segment of the business (which accounts for almost half of Walt Disney’s revenue), which can count the major domestic broadcasting network of ABC and the sports media network ESPN as the two-headed dragon within this segment.

And while ABC and ESPN operate somewhat independently of one another, Walt Disney also uses both to complement each other, and they also use these networks to cross-promote other products (like the preview of the upcoming Star Wars: The Last Jedi during ESPN Monday Night Football).

While there are concerns over cord-cutting and how this will impact ESPN (as well as some other cable networks Walt Disney owns, like The Disney Channel), Walt Disney is tremendously skilled at becoming more diversified and increasing its profit straight through these concerns.

Part of that increasing diversification and profit story lies within the company’s recent success and transformations in its Studio Entertainment segment (almost 20% of the company’s revenue), which has bolted on Marvel Studios and Lucasfilm in recent years to shape what is now the world’s most foremost movie studio.

Those acquisitions have allowed the company to pump out billion-dollar movies like candy, building out massive franchises practically from the ground up (with their superhero movies) or continuing established franchises (i.e., Star Wars: The Last Jedi). And that’s on top of the studio’s longstanding success within the existing Disney brand (i.e., Frozen).

Furthermore, Walt Disney is unequaled in its ability to holistically cross-promote its products in a very complementary manner across all of its brands and platforms.

For example, Star Wars: The Last Jedi will allow the company to not just profit massively from the movie, but Walt Disney will also sell related merchandise inside and outside of its theme parks. And they’ll also use these characters and the movie’s worlds as attractions to pull people into their parks, further entrenching their related brands in this interrelated manner. There is then the development of television programs related to these universes, which only bolsters the company’s upcoming plans to offer its own streaming service.

But all of this would be far less interesting if shareholders weren’t directly benefiting and collecting their fair share of Walt Disney’s rising profit.

Fortunately for shareholders like myself, that’s not the case at all.

In fact, Walt Disney has paid an increasing dividend for eight consecutive years.

And due to the aforementioned depth and quality of the business, I think this is a streak that will continue on for many years.

Due in part to the company’s impressive underlying business growth over the last decade, the dividend growth has also been quite impressive.

The five-year dividend growth rate stands at 30.1%, which is just massive.

However, that kind of dividend growth was funded in part by an expanding payout ratio, as the payout ratio was easy to expand five years ago.

That’s an option that’s slightly less obvious and appealing moving forward, which is why investors should expect dividend growth to moderate to a more reasonable level.

To that point, the most recent dividend increase was a bit under 8%.

Now, the payout ratio is still quite low. At 29.5%, there’s still plenty of room for Walt Disney to hand out outsized (relative to EPS growth) dividend increases for the near term, but the disparity shouldn’t be as great as it has been over the last few years (which we’ll look at shortly).

The only possible drawback to this stock on the dividend front might be the yield.

Coming in at just 1.60%, there’s something to be desired here for investors interested in more current income.

Keep in mind, however, this yield is over 30 basis points higher than the stock’s own five-year average yield, bringing us back to my earlier point on undervaluation and how that can impact/improve yield.

In addition, in my view, this stock makes more sense for a younger investor who has time for the growth in dividend growth investing to play out over the long run.

But if you do have that time to just let Walt Disney make a ton of money for you and share that profit directly with you in the form of that growing dividend, this could be a fantastic long-term investment.

Speaking of making a ton of money, let’s see what the company is doing there.

We’re now going to look at Walt Disney’s top-line and bottom-line growth over the last decade, which tells us a lot about the company’s underlying growth profile, which will in turn tell us a lot about the company’s wherewithal when it comes to dividend growth.

This will also help us later value the business and its stock.

In order to value the business, we must first build an expectation for growth.

Well, looking at what a company has done over the long term (using the last decade as a proxy) is a great place to start when setting expectations.

However, we invest in a where a company is going, not where it’s been. And that’s why we’ll also look at a near-term professional expectation for the company’s profit growth.

Combining and blending the past and future in this manner should allow us to make some reasonable estimates about where Walt Disney is going, what the dividend growth will look like moving forward, and what the stock might be worth.

Walt Disney has increased its revenue from $37.843 billion to $55.137 billion from fiscal year 2008 to fiscal year 2017. That’s a compound annual growth rate of 4.27%.

This is right in line with what I’d expect for a large and mature company like Walt Disney. Mid-single-digit top-line growth like this is, in my view, where they should be. I’d prefer to see something a tad closer to 5%, but this isn’t far away.

Meanwhile, the company grew its earnings per share from $2.28 to $5.69 over this same period, which is a CAGR of 10.70%.

The material excess between top-line and bottom-line growth can be explained by a combination of significant margin expansion and share repurchases over the last decade.

Walt Disney reduced its outstanding share count by approximately 19%, while they expanded net margin heavily.

Moving forward, CFRA believes Walt Disney will compound its EPS at an annual rate of 7% over the next three years.

This would be a sizable departure from what’s been demonstrated by the business over the long run.

While growing the business at an 11% rate over the next decade might be tough, 7% seems a bit conservative, in my view.

Nonetheless, Walt Disney coming in somewhere in the middle (say, 9% compound EPS growth) over the foreseeable future would allow for dividend growth that’s quite a bit higher (due to the low payout ratio).

The company’s quality extends to the balance sheet, as we’ll see.

Walt Disney currently has a long-term debt/equity ratio of 0.46 and an interest coverage ratio over 28.

These are solid numbers in absolute terms, but they’re somewhat phenomenal when considering that the company operates and maintains large and expensive theme parks.

The profitability, as one might expect, is also nothing less than impressive.

Over the last five years, the company has averaged net margin of 15.63% and return on equity of 18.47%.

Both numbers are great. And both numbers are considerably greater than they were a decade ago, meaning this business is about as strong and profitable as it’s ever been.

All in all, there’s just not much to dislike about this business.

While there are some concerns about cord-cutting and how that will impact some of their media properties, especially ESPN, Walt Disney continues to build around this, strengthen and diversify itself, and build out new ways of delivering content to customers – a streaming version of ESPN is a fine example of this.

Meanwhile, Disney theme parks, licensing, the company’s movie pipeline, and the ongoing cross-promotion are just about as strong as ever, as evidenced by the fundamentals.

The force is strong with Walt Disney. But even a great business isn’t worth paying too much for. Is this stock undervalued right now?

The stock is available for a P/E ratio of 18.52, which is lower than both the broader market (which has a P/E ratio well north of 20 right now) and the stock’s own five-year average P/E ratio (which is almost 20).

Investors are also paying less for the company’s cash flow relative to its three-year average.

And the yield, as noted earlier, is higher than its recent historical average.

It’s surprising that one of the highest-quality businesses on the planet would be available for a valuation lower than the broader market (which certainly includes plenty of lower-quality businesses mixed in). But what might be a reasonable estimate of its intrinsic value? How cheap might this stock be?

I valued shares using a two-stage dividend discount model analysis (to account for the low yield/high growth dynamic).

I factored in a 10% discount rate.

I assumed a dividend growth rate of 13% for the next decade.

And then I assumed a long-term dividend growth rate of 8% thereafter.

This initial growth rate might look a little high relative to the most recent dividend increase, but the low payout ratio would portend much better results moving forward. Moreover, the historical dividend growth looks a lot better through a longer-term lens.

And the long-term dividend growth rate would assume underlying business growth in kind over the long haul, which the company has been able to do for a very long time. I essentially see Walt Disney continuing to do what it does for the foreseeable future.

The DDM analysis gives me a fair value of $138.27.

The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.

The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.

It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.

I find it to be a fairly accurate way to value dividend growth stocks.

My analysis would indicate the stock is at least modestly undervalued right now, which is perhaps more than one needs when considering the relative quality of this business and dearth of value across the broader market. But my perspective is limited to my own biases and viewpoints, which is why I like to compare what I come up with to that of what professional analysts conclude.

Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.

1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.

Morningstar rates DIS as a 4-star stock, with a fair value estimate of $130.00.

CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.

They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.

CFRA rates DIS as a 4-star “BUY”, with a fair value calculation of $116.71.

So there’s a general consensus on this stock being a pretty good idea right now, although the latter firm seems to indicate a less sanguine view on the valuation. Nonetheless, averaging out these three numbers/perspectives gives us a final valuation of $128.33, which would show the stock is potentially 21% undervalued here.

Bottom line: Walt Disney Co. (DIS) is one of the highest-quality businesses in the world, with a number of some of the best brands and platforms in all of entertainment, which have proven their immense value over time. This company continues to deliver a customer experience unlike any other in its space. With the potential that shares are 21% undervalued on top of what will likely be double-digit dividend growth for years to come, this dividend growth stock could also deliver an investor experience unlike any other in its space.

— Jason Fieber

Note from DTA: How safe is Disney’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 96. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, Disney’s dividend appears very safe and extremely unlikely to be cut. Learn more about Dividend Safety Scores here.