One Great Dividend Grower to Buy Today

By TradeSmith Research Team

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It’s no secret that the stock market goes up over time. Look at any long-term chart and you’ll see a line trending up and to the right.

But there’s a big secret behind that line…

One small segment of the market is responsible for nearly half of that performance.

And that’s high-quality dividend stocks.

A couple weeks ago, I shared how powerful dividends are for your portfolio.

41% of the S&P 500’s performance is attributed to dividends since 1930. That’s a huge piece of the stock market pie.

If you’re not in quality dividend stocks, you’re missing out on a huge part of the action.

So today, I’ll show you which dividend stocks are the best to own. I’ll even single out a top-tier dividend company that’s primed for big upside…and show you exactly how I found it.

Focus on the Aristocrats

At first glance, new investors may be lured into thinking the largest dividend yields are the best.

That’d be wrong. A large yield means nothing if the stock doesn’t maintain it. And no dividend is big enough to counter major capital losses.

Instead, investors should focus on stocks that continually raise their dividends — think of Dividend Aristocrats, companies with 25+ years of consecutive dividend hikes — as well as stocks that begin issuing a dividend which didn’t before.

Check this out…

From 1973-2022, $100 invested in dividend growers and initiators turned into $13,061. Those gains trounce the $8,060 from dividend payers that didn’t grow their payouts.

Even more incredible, investing in stocks with no change in dividend policy resulted in only $2,441, much less than the equal-weighted S&P 500 Index:

Source: Ned Davis Research and Hartford Funds

This shows us that not all dividend stocks are created equal. You need to isolate the companies with the ability to sustain and grow their dividend over time.

Now that we know that companies which consistently raise their dividends tend to crush the market, how can we go about finding them?

1-Step Method to Find Top Dividend Stocks

One easy metric to scan for companies with a strong ability to pay dividends is with the Dividend Payout Ratio (DPR). This ratio is an easy way to learn how much a company is shelling out via dividends relative to its earnings.

Firms with high DPRs indicate that a large share of their earnings are dedicated to paying dividends. This can be a problem because if earnings fall, their dividend could be in jeopardy.

Conversely, low DPRs suggest ample room for a company to not only continue their dividend payments, but also increase them.

For me, I look for companies with DPRs of 50% or less as potential dividend growth targets. This 50% indicates 2 important concepts:

  1. If earnings fall modestly, it shouldn’t impact the dividend. So, there’s a bit of safety here.
  2. If earnings increase, the company will be able to increase the dividend payout.
To calculate a company’s dividend payout ratio, simply take the last 12 months of dividends paid and divide it by the last 12 months of earnings per share (EPS).

Let’s now do an example of a company screening very well on the Dividend Payout Ratio…

One Dividend Growth Stock to Grab on Sale

A few weeks back, I highlighted how the consumer staples sector has been massively underperforming the market lately.

Year-to-date, the dividend-heavy Consumer Staples Select Sector ETF (XLP) is down 8.7% vs the S&P 500’s gain of 14.2%.

Most would see this weakness and turn the other way. I think that’s a mistake.

Opportunities abound when dividend stocks face pressure. And Dollar General (DG) is the posterchild for stocks under pressure.

In 2023, DG is down 54%… an awful performance to say the least. After the company slashed its sales and earnings last week, their full year EPS guidance sank to $7.35/share from $7.70.

Generally speaking, it can be a very bad sign when a company guides lower. However, just about all corporations will guide lower at some point in their cycle.

It’s important to understand when this setback hits a high-quality stock with the ability to right the ship.

Dollar General, a discount merchandise store founded in 1939, is one such high-quality dividend growth story on sale.

Even after the earnings cut, their DPR sits at a very healthy level. By dividing the company’s forward dividend payments of $2.36 by their expected earnings of $7.35, the DPR sits at 32.1%:

This tells me that not only is their dividend sustainable, it has plenty of room to rise in the years ahead.

Based on history, that’s a good bet.

Since 2015, the company has regularly raised its payout. This latest rout puts the stock back at levels last seen in 2019.

Additionally, the forward yield sits at 2.1%… its highest ever.

Considering that the stock is at levels not seen since 2019, when the dividend was half (.29 vs .59) where it is today, at $111 per share, this is a fire sale on a tremendous company:

Source: YahooFinance

They say beauty is in the eye of the beholder. I agree. And what I see is a beautiful setup!

Given the historical dominance of dividend growers, a modest dividend payout ratio, and a rich history of dividend increases, DG looks like a steal.

With stocks broadly under pressure, now is the perfect time to be hunting for dividend-growth opportunities like these.

One datapoint — the DPR — led us to finding a potential great deal in Dollar General stock. This highlights the power of using data in your investing process.

That’s what TradeSmith is all about. And that’s just the tip of the iceberg for how we use data to find great income opportunities.

From Mike Burnick’s Ultimate Income advisory… to the 99%-winner Constant Cash Flow trading algorithm… to your daily options income tool Infinite Income Loop.

You, as a TradeSmith Platinum subscriber, have everything you need to generate consistent income from the market no matter which way it turns.

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