If you can’t beat them, join them?
There’s a lot of debate over taxation, particularly as it relates to taxing vast concentrations of wealth.
That debate is completely uninteresting to me.
I think it totally misses the point.
Instead of wasting time with these debates, why not instead devote resources toward joining in and building vast wealth for oneself?
Because that vast wealth can generate the vast passive income necessary to unlock financial freedom.
This is especially true when employing the dividend growth investing strategy, which is a long-term investment strategy entailing buying and holding shares in world-class businesses paying out steadily rising cash dividends to shareholders.
Hundreds of such businesses can be found over at the Dividend Champions, Contenders, and Challengers list – a curated library of US-listed stocks that have raised dividends each year for at least the last five consecutive years.
These are some of the greatest businesses in the world, which is why they’re able to routinely increase revenue, profit, and dividends.
And investing in great businesses is a pretty good path toward great investment results, wealth, passive income, and freedom.
I’ve used this line of thinking myself, applying the dividend growth investing strategy for more than 15 years now.
That’s what’s allowed me to build the FIRE Fund, which is my real-money portfolio generating enough five-figure passive dividend income for me to live off of.
In turn, that unlocked financial freedom and enabled me to retire in my early 30s.
Now, while investing in great businesses is an excellent start, there’s also the very important matter of investing at great valuations.
And that’s because price is only what you pay, but it’s value that you 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.
Taking a join-them approach when it comes to investing and building wealth and freedom avoids political nonsense, and the best way to take that approach might be via routinely buying undervalued high-quality dividend growth stocks.
But how does one know when something might be undervalued?
Well, that’s where Lesson 11: Valuation can come in handy.
Written by fellow contributor Dave Van Knapp, it describes what valuation is and how to apply simple tools in order to estimate the fair value of just about anything you might look at.
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…
Domino’s Pizza, Inc. (DPZ)
Domino’s Pizza, Inc. (DPZ) is an American multinational pizza restaurant chain.
Founded in 1960, Domino’s is now a $10 billion (by market cap) QSR leader employing more than 8,000 people.
Domino’s is the largest pizza restaurant chain in the world, with over 22,000 stores located across more than 90 different markets (approximately 2/3 of stores are located outside of the US).
Almost all stores globally are franchised.
The company reports results across three segments: Supply chain, 60% of FY 2025 revenue; U.S. stores, 33%; and International Franchise, 7%.
This is a simple operation involving a global chain of restaurants selling pizza.
There’s beauty in that simplicity.
Pizza is a timeless, affordable food staple that travels well.
Almost everyone loves pizza, and Domino’s is able to flexibly adapt the product to local markets and tastes.
In addition, because each local restaurant is able to quickly make and deliver pizza right to customers, the convenience factor is incredible.
On top of that, pizza tends to be one of the cheapest ways to feed multiple people.
All of that leads to repeat business, as pizza needs to be repurchased once consumed.
If that weren’t great enough already, Domino’s made this even more powerful through franchising.
By franchising the vast majority of its stores, Domino’s created a capital-light business model with a steady stream of royalty revenue.
The company has also incorporated technologies and innovation into its processes, creating even stickier customers through tools such as order tracking and loyalty programs.
Another factor reinforcing customer loyalty and convenience is the company’s “fortressing” strategy, which involves the shortening of delivery radiuses by putting in new stores in the same markets, as close to customers as possible, resulting in shorter delivery times and lower costs per delivery.
The company almost can’t lose.
Domino’s has scaled, franchised, and reinforced a simple business idea to great success, leading to consistent revenue, profit, and dividend growth.
Dividend Growth, Growth Rate, Payout Ratio and Yield
To date, Domino’s has increased its dividend for 14 consecutive years.
Its 10-year dividend growth rate of 18.8% is blistering, up there with some of the most prolific dividend growers in the world.
Moreover, the company has consistently handed out double-digit raises over the last decade, with even the most recent dividend raise coming in at over 14%.
Oftentimes, when getting a growth rate this high, a low starting yield is the trade-off one must make.
However, in this case, the stock also yields a market-beating 2.5%.
This isn’t just unusual in the general sense but also relative to the stock’s own history.
To that point, this yield is 120 basis points higher than its five-year average.
Said another way, the current starting yield is more than twice as high as it’s averaged over the last five years.
And with the payout ratio sitting at just 45.1%, it’s not like this dividend is suddenly unsafe or unlikely to continue growing as it has been.
This is a rare case where a double-digit dividend growth rate comes with a reasonably attractive yield, making this uncommonly compelling.
Revenue and Earnings Growth
As compelling as it may be, though, this is mainly based on past information.
However, investors must always be preparing for future information, as today’s capital gets put on the line and risked for tomorrow’s rewards.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will be useful when the time comes to estimate fair value.
I’ll first show you what the business has done over the last ten years in terms of its top-line and bottom-line growth.
And I’ll then reveal a professional prognostication for near-term profit growth.
Amalgamating the proven past with a future forecast in this manner should provide us with the ability to roughly assess where the business could be going from here.
Domino’s advanced its revenue from $2.5 billion in FY 2016 to $4.9 billion in FY 2025.
That’s a compound annual growth rate of 7.8%.
Strong top-line growth here.
Meanwhile, earnings per share rose from $4.30 to $17.57 over this period, which is a CAGR of 16.9%.
Excellent.
We can now see that high-teens dividend growth has been fueled by like EPS growth all along, which explains why the payout ratio isn’t yet high in the face of an aggressive dividend policy.
Excess bottom-line growth was propelled by extensive buybacks, with Domino’s reducing its outstanding share count by more than 30% over the last decade.
Looking forward, CFRA believes that Domino’s will deliver high-single-digit EPS growth over the near term.
CFRA’s forecast for 2027 EPS is just over $20, which implies a ~7% CAGR between now and then.
I think that’s a reasonable, if cautious, take.
CFRA is trying to balance the clear leadership and built-in attractiveness of Domino’s (all of which I noted earlier) against the extreme competitive pressure within the broader QSR space.
Now, let’s be clear: Domino’s has simply too many levers to pull, including buybacks, SSS growth, loyalty, technology, new product releases, store expansion, etc.
Nobody is doubting that Domino’s is going to do well and continue growing.
It’s really more a matter of the rate of growth.
On that point, it does make sense to cool the expectations, especially when considering the absolute size of Domino’s (which only makes it more challenging to grow in relative percentage terms).
For its part, Domino’s has been registering slowing EPS and SSS growth over the last few years, although I’d also note that the recent Q3 2026 quarter showed 12.7% YOY EPS growth.
To me, a 7% number seems too conservative when put up against what Domino’s has been demonstrating.
Then again, since the yield has risen so much, a much lower growth rate has already been priced in at this point, meaning there could be plenty of upside surprise in store for this name over the next several years.
Either way, Domino’s is primed for at least high-single-digit dividend growth over the near term, which pairs well with that starting yield.
Financial Position
Moving over to the balance sheet, Domino’s has a middling financial position.
The long-term debt/equity ratio is N/A (due to negative common equity stemming from the buybacks), while the interest coverage ratio is near 5.
Domino’s ended last fiscal year with ~$4.5 billion in net long-term debt, which isn’t necessarily egregious against the $10 billion market cap.
While it’s far from a great balance sheet, Domino’s operates within an asset-light framework built around franchises; Domino’s is a fee collector with minimal direct overhead costs.
I’m a bit of a stickler and would love to see much less debt, but Domino’s has an unusual amount of leeway here.
Profitability, on the other hand, is very strong.
ROA has averaged 31.4% over the last five years, while net margin has averaged 11.6%.
Also, ROIC is routinely north of 60%.
There’s no ROE due to the aforementioned negative common equity.
Speaking to the point I was just making above, Domino’s is able to generate extraordinary returns on capital due to its position as an asset-light fee collector.
Putting that type of framework on top of something as timeless as pizza is ingenious.
Overall, Domino’s has a fantastic business model with very powerful economics.
And with economies of scale, brand power, and a global franchise footprint with density, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Competition, litigation, and regulation are omnipresent risks in every industry.
I see regulation and litigation risks as being muted for Domino’s relative to the typical business.
Conversely, its industry features extreme levels of competition.
Helping to relieve some of the competitive pressure is the aforementioned “fortressing” strategy, which often makes Domino’s the most convenient option in any given marketplace.
The balance sheet is stretched and limits financial flexibility.
Variable input costs and labor challenges are risks, and recent inflation hasn’t been kind.
The global footprint is an advantage, but a larger absolute footprint is harder to grow in relative terms.
Being global, Domino’s faces geopolitical risks and exchange rates.
I don’t think Domino’s has a particularly high level of risks, but the market has punished the stock with a multiyear drawdown of 30%+ anyway and created a more attractive valuation…
Valuation
The P/E ratio has dropped to 18.8.
That’s far lower than its five-year average of 26.1.
The cash flow multiple of 14.8, which is very undemanding even in isolation, is also way below its five-year average of 22.1.
And the yield, as noted earlier, is significantly higher than 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 dividend discount model analysis.
I factored in a 10% discount rate and a long-term dividend growth rate of 8%.
The model’s assumption is rather conservative when contrasted with the proven, demonstrated dividend growth out of the business over the last decade, the last five years, and even more recently.
However, the payout ratio has expanded a bit and isn’t as low as it once was.
The balance sheet is stretched.
And the near-term forecast for EPS growth is only in a high-single-digit range, which would support like dividend growth.
Although I think that forecast doesn’t give Domino’s its full credit, I’d rather err on the side of caution and be pleasantly surprised.
The DDM analysis gives me a fair value of $429.84.
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 view the valuation as being quite alluring after the multiyear drawdown.
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 DPZ as a 3-star stock, with a fair value estimate of $365.00.
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 DPZ as a 3-star “HOLD”, with a 12-month target price of $322.00.
I came in high this time, diverging from what’s commonly a tighter consensus. Averaging the three numbers out gives us a final valuation of $372.28, which would indicate the stock is possibly 8% undervalued.
Bottom line: Domino’s Pizza, Inc. (DPZ) has built an asset-light franchise model on top of a timeless food staple, making the company a reliable fee collector with powerful economics. With a market-beating yield, double-digit dividend growth, a moderate payout ratio, nearly 15 consecutive years of dividend increases, and the potential that shares are 8% undervalued, long-term dividend growth investors should seriously considering delivering stock in this company to their brokerage accounts.
-Jason Fieber
Note from D&I: How safe is DPZ‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 55. 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, DPZ’s dividend appears Borderline Safe with a moderate risk of being cut. Learn more about Dividend Safety Scores here.
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.
Disclosure: I’m long DPZ.
