History doesn’t necessarily repeat itself, but it does often rhyme.

What can investors take away from this?

Well, the last 100 years has treated shareholders of wonderful businesses incredibly well.

Will the next 100 years look similar?

I’m inclined to believe so.

As such, one might want to seriously consider being positioned for that.

How to best position oneself?

I’d argue the answer is simple: Buy and hold high-quality dividend growth stocks.

These are stocks that represent equity in world-class enterprises that pay reliable, rising dividends to their shareholders.

You can find many examples by perusing the Dividend Champions, Contenders, and Challengers list.

This list has compiled invaluable information on hundreds of US-listed stocks that have raised dividends each year for at least the last five consecutive years.

Unsurprisingly, many of these are amazing long-term investments.

That’s because it requires greatness to be able to consistently grow profits and dividends, and greatness tends to outperform over the long run.

I’ve been personally buying these stocks for years, building up the FIRE Fund in the process.

That’s my real-money portfolio, and it produces enough five-figure passive dividend income for me to live off of.

I’ve been fortunate enough to be able to live off of dividends since I retired in my early 30s.

How was I able to retire at such a young age?

My Early Retirement Blueprint explains.

Now, as much as I love high-quality dividend growth stocks, you can’t buy anything blindly.

Valuation at the time of investment is a very important consideration.

After all, price is only what you pay, but it’s value that you ultimately get.

An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.

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

Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.

That higher yield correlates to greater long-term total return potential.

This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.

Prospective investment income is boosted by the higher yield.

But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.

And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.

These dynamics should reduce risk.

Undervaluation introduces a margin of safety.

This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.

It’s protection against the possible downside.

Using history as your guide and buying undervalued high-quality dividend growth stocks could be the right way to set yourself up for increasing wealth and passive dividend income over the coming decades.

Of course, taking advantage of undervaluation first requires one to understand valuation.

Fear not.

My colleague Dave Van Knapp has made it easier than you might think.

His Lesson 11: Valuation, which is part of a comprehensive series of “lessons” on dividend growth investing, introduces the concept of valuation and breaks it down into simple-to-understand terms.

With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…

D.R. Horton, Inc. (DHI)

D.R. Horton, Inc. (DHI) is an American home construction company.

Founded in 1978, D.R. Horton is now a $38 billion (by market cap) homebuilding major that employs more than 13,000 people.

By volume, D.R. Horton is the largest homebuilder in the United States.

There are three key factors that make D.R. Horton really appealing for long-term investment.

First, there’s a structural and favorable imbalance between supply and demand.

It’s been estimated that the US has a supply deficit of around 6 million homes.

For many years, and for many reasons, annual US home production has been consistently coming up woefully short of what’s necessary to meet demand.

This large gap between what the market demands and what’s being brought to market is a long-term tailwind for D.R. Horton.

Even if new home construction suddenly starts to come up in a meaningful way, it’ll take many years of overproduction just to close the existing gap.

Second, D.R. Horton has scale in an industry where scale is practically necessary.

Building homes is extremely capital intensive, and D.R. Horton’s status as the “800-pound gorilla” gives it the financial wherewithal to aggressively compete through the cycles.

This is a very difficult industry for new entrants, as the capital requirements are very high.

Third, D.R. Horton is catering to the appropriate area of the market.

See, the company focuses on the first-time buyers looking for value.

Just under 70% of its homes were sold over the last year at a price of less than $400,000.

This area of the market is where the greatest imbalance between supply and demand can be found, as there’s a constant stream of young adults trying to form households at affordable price points.

Because of all of this, D.R. Horton has had a magnificent run since the bottoming out of the US housing market post-GFC.

The company’s stock is up more than 450% over the last decade alone, supported by rapid growth and improving fundamentals across the business.

While the US housing market will undoubtedly be prone to booms and busts in the future, a combination of scale, supply shortages, and targeted construction all bode well for D.R. Horton.

And it’s why I think the company’s revenue, profit, and dividend should continue to rise for years to come.

Dividend Growth, Growth Rate, Payout Ratio and Yield

Already, the company has increased its dividend for nine consecutive years.

The five-year dividend growth rate of 16.8% just goes to show what a fast start D.R. Horton is off to.

And I haven’t seen much of a slowdown here, as recent dividend raises have been in the double digits.

Now, one can never expect a high yield when you get this much growth.

There’s almost always a trade-off to make on one side or the other.

Indeed, to that point, the stock’s yield is just 0.9%.

That is close to the stock’s own five-year average yield.

And with the payout ratio sitting at just 7.1%, which is incredibly low, this is a very safe dividend that is set for much more growth ahead.

Income-oriented investors looking for big dividend payments today, even if those big dividend payments come at the expense of total return over the long run, probably won’t be attracted to something like D.R. Horton.

However, for long-term dividend growth investors who are looking for lots of growth and outstanding long-term total return, it’s compelling.

Revenue and Earnings Growth

As compelling as some of these dividend numbers may be, many of them are looking backward.

However, investors must always look forward, as today’s capital is being risked for the rewards of the future.

Thus, I’ll now build out a forward-looking growth trajectory for the business, which will be of help when the time comes later to estimate intrinsic value.

I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth.

And I’ll then reveal a professional prognostication for near-term profit growth.

Lining up the proven past with a future forecast in this manner should allow us to put together an idea of where the business could be going from here.

D.R. Horton escalated its revenue from $6.3 billion in FY 2013 to $33.5 billion in FY 2022.

That’s a compound annual growth rate of 20.4%.


Stunning revenue growth here.

Many tech companies out there would love to grow the top line this fast.

Meanwhile, earnings per share grew from $1.33 to $16.51 over this period, which is a CAGR of 32.3%.


Most of the excess bottom-line growth has been fueled by steady margin expansion, which has been breathtaking.

Put simply, D.R. Horton is growing faster than almost any other business I know of.

One might not automatically associate a homebuilder with a high growth rate like this, but that’s exactly what you have here.

The big question, of course, is: Will it continue?

Looking forward, CFRA is forecasting a 5% CAGR in D.R. Horton’s EPS over the next three years.

CFRA seems to be answering the question with a resounding “no”.

I wouldn’t expect D.R. Horton to put up world-beating numbers for decades on end.

However, CFRA’s projection could be a bit too dour.

And it almost seems at odds with CFRA’s otherwise glowing review of the business.

For example, CFRA states: “Despite high mortgage rates, [D.R. Horton] has benefited from a tight existing home market leading, primarily, entry-level home buyers to engage in homebuilding transactions. Expectations of cooling demand continue to be tested by incoming data suggesting higher mortgage rates for longer. So far, the consumer remains resilient, and we expect the recent uptick in home prices impacting affordability to be offset by falling mortgage rates through 2024. As a larger homebuilder, we expect [D.R. Horton] to benefit from scale and see it favorably positioned to incentivize transactions in a slowing economy.”

I think CFRA keyed on an important point here.

The rapid rise in mortgage rates caused a lot of pundits to call for a drastic fall in home sales and prices, yet that hasn’t happened at all.


Well, I think it comes down to the point made earlier on tight supply, which CFRA reiterated in the quoted passage.

I’ll also note that D.R. Horton is currently working through a backlog worth over $7 billion – before new orders are accounted for.

The last decade was really special for D.R. Horton, and I don’t see it as something that an investor can put forth as a realistic baseline for future growth expectations.

Moreover, the next few years could work out similarly to what CFRA is putting forth.

However, the long-term market dynamics work strongly in D.R. Horton’s favor, as a massive supply deficit is a years-long tailwind for homebuilding.

With the payout ratio being below 10%, D.R. Horton could actually have flat earnings for the next few years and still pump out low-double-digit dividend growth.

That said, the growth forecast being posed above isn’t flat, which only gives D.R. Horton even more dividend growth firepower.

Overall, I would be surprised to see D.R. Horton deliver anything but low-double-digit dividend growth over the next few years, although I think that will settle down into a high-single-digit range at some point thereafter.

Financial Position

Moving over to the balance sheet, D.R. Horton has a fantastic financial position.

The long-term debt/equity ratio is 0.3, while the interest coverage ratio is nearly 50.

Moreover, the company’s cash position is healthy.

Profitability is outstanding.

Net margin has averaged 12.9% over the last five years, while return on equity has averaged 24.9%.

D.R. Horton’s returns on capital are up there with some of the world’s best businesses.

I can see why Warren Buffett’s firm recently bought shares in the homebuilder.

Fundamentally speaking, D.R. Horton is very impressive.

And with economies of scale, barriers to entry, leading market share, and industry know-how, the company does benefit from durable competitive advantages.

Of course, there are risks to consider.

Litigation, regulation, and competition are omnipresent risks in every industry.

The housing industry is notoriously cyclical and sensitive to overall economic trends.

There is direct exposure to interest rates, as interest rates affect demand for mortgages and housing.

Building homes is a capital-intensive activity, and D.R. Horton must continuously manage its inventory properly.

Input costs are a serious consideration, and inflation is causing upward pressure on these costs.

D.R. Horton’s catering to first-time, entry-level homebuyers makes the business especially sensitive to overall economic health.

Labor has recently been tight in the US, and any labor shortages could severely curtail production.

These risks should be carefully thought over.

However, the stock’s valuation, after a recent 15% slide in price, looks attractive and should also be carefully thought over…

Stock Price Valuation

The stock is currently trading hands for a P/E ratio of 8.1.

That obviously compares extremely favorably to the broader market’s earnings multiple.

That said, this is a stock that often gets little respect when it comes to multiples.

Its own five-year average P/E ratio is only 9.3.

That is absurdly low for a business that’s been growing this fast.

Of course, this combination of a low valuation and a high growth rate is what has led to a remarkable total return over the last 10 years.

Also, the yield, as noted earlier, is close to its own recent historical average.

So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?

I valued shares using a two-stage dividend discount model analysis.

I factored in a 10% discount rate, a dividend growth rate of 16% over the next decade, and a long-term dividend growth rate of 8%.

This near-term dividend growth rate might look aggressive at first glance.

However, it’s actually lower than D.R. Horton’s demonstrated dividend growth rate over the last five years.

Furthermore, the payout ratio here is under 10% – giving the business tremendous flexibility on the dividend, even in the face of a possible slowdown in bottom-line growth.

I mean, the dividend could double tomorrow and still be easily covered.

I’m basically assuming that D.R. Horton will continue to pump out dividend growth that is in line with what it’s been pumping out for a number of years now.

Because of major US housing supply shortcomings, I really don’t see the bottom falling out here.

That’s evidenced by demand holding up in the face of the fastest rise in interest rates in US history.

On the other hand, I’m also not modeling in any kind growth acceleration, which I see as a down-the-middle compromise.

The DDM analysis gives me a fair value of $105.39.

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.

I think I was being fair with my valuation, and the stock comes out looking fair.

But we’ll now compare that valuation with where two professional stock analysis firms have come out at.

This adds balance, depth, and perspective to our conclusion.

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 DHI as a 3-star stock, with a fair value estimate of $122.00.

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 DHI as a 4-star “BUY”, with a 12-month target price of $145.00.

Surprisingly, I came out very low here. Averaging the three numbers out gives us a final valuation of $124.13, which would indicate the stock is possibly 9% undervalued.

Bottom line: D.R. Horton, Inc. (DHI) is a high-quality, industry-leading business that features high returns on capital, rapid growth, and a stellar balance sheet. Its industry is notoriously cyclical, but supply shortages and firm demand are evidentiary of favorable change. With a double-digit dividend growth rate, an acceptable yield, an extremely low payout ratio, nearly 10 consecutive years of dividend increases, and the potential that shares are 9% undervalued, this could be a chance to follow Warren Buffett’s firm into a great long-term investment.

-Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

Note from D&I: How safe is DHI’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 85. 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, DHI’s dividend appears Very Safe with a very unlikely risk of being cut. Learn more about Dividend Safety Scores here.

Source: Dividends & Income