This month, I’m doing something a little different: Taking you on a journey to look for a high-quality dividend-growth stock among lesser-known companies.
The journey starts in a dividend-growth (DG) blog that I’m part of, where many commenters suggest, or say they’ve just bought, particular companies. Often, these are well-known DG companies like Johnson & Johnson (JNJ) or AbbVie (ABBV), immediately recognizable to anyone.
But other times, when they just list the ticker symbol, I don’t even know what it is. I have to look them up to see what they’re talking about.
I decided to write some of these tickers down, do my own research, and see whether any of them are actually good DG candidates. I’m looking for a hidden gem or two that might augment my Dividend Growth Portfolio in a way that I wasn’t expecting.
Here are my ground rules:
- Obscurity: The stock has fewer than 20,000 followers on Seeking Alpha. (Many of the well-known DG names have hundreds of thousands of followers.)
- Yield: 2.5% or more
- Dividend growth rate: 5% or more per year over the previous five years
Out of the scores of ticker symbols I started with, just nine stocks passed those three simple screens. Here they are in alphabetical order:
My first reaction after filling out the table above was, “Wow.” Just off those statistics, some of those stocks look like really fine candidates. All except one have double-digit DGR streaks. All but two have 5-year DGRs of 8% or more per year.
Disclosure: I own one, UGI. It’s a position I started earlier this year. To be honest, I forget what first brought it to my attention.
But a good DG investor wants to know more than a stock’s yield and recent dividend growth rate. We want to know more about company quality, dividend sustainability, and topics like that.
My quick way to get insights into those things is to use my Quality Snapshots. The Quality Snapshots employ quality ratings from sources that I trust and respect.
- Value Line’s Safety grade
- Value Line’s Financial Strength grade
- S&P’s Credit rating
- Morningstar’s Moat rating
- Simply Safe Dividends’ Dividend Safety grade.
I assign 0 to 5 points to each factor according to a scoring table that you can find in DGI Lesson 20: My ‘Quality Snapshot’ Grading System. The system is just common sense: High scores are awarded to better ratings, low points or zero to bad ratings.
A company’s total Quality Snapshot score can be as high as 25 points (5 points x 5 factors). Here’s what the scores mean:
The top two (green) categories are where I like to find most of the stocks that I invest in.
Now, let’s see if there are any hidden gems among the nine candidates. Below are the quality snapshots of each stock, still presented in alphabetical order. Note that I use colors to denote the points awarded to each factor:
What do you notice? The main thing is that just because a source recommends a stock, or announces that he just bought it, does not mean that the company is a good bet. It may have flaws that you do not want in a holding of your own.
Now here is the same chart from the beginning of the article with the quality scores added and the chart rearranged in order of those scores. I have also color-coded each stock’s yield, dividend-growth rate, increase streak, and Quality Snapshot score according to the way that I normally score those factors.
To me, the clear winner of this exercise is Atmos Energy (ATO). While it has a modest yield (2.6%), it has a good 8%/year dividend-growth rate. ATO has raised its dividend for 33 straight years, including most recently by 8.7% last November. Its 2021 raise should be announced soon.
Here is ATO’s Quality Snapshot again.
Its quality score of 22 is four points better than any of the other stocks examined. All of the categories get green scores of either 4 or 5 points each. ATO’s dividend safety rating is the highest possible at 99. Its total score of 22 points is at the top of the Above-Average range, just one point short of Excellent.
I think it’s fair to call Atmos Energy a hidden gem.
And it is fairly valued right now, selling for just about its fair price, which I calculate as $95 per share. (See DGI Lesson 11: Valuation for the details on how I compute fair prices.)
I had two objectives for this article:
- Illustrate one way of finding stock ideas and evaluating them once you find them, as well as show a way to deal with the blizzard of unknown ticker symbols that you might run across every day.
- Identify a hidden-gem stock to illustrate how a little digging can lead you to stock candidates that you might otherwise have never considered.
I hope that you enjoyed this approach and find it useful in your own investing.
This is not a recommendation to buy, hold, sell, trim, or add to ATO or any other stock mentioned. Any investment requires your own due diligence. Always be sure to match your stock picks to your personal financial goals.
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