This is the third of a five-part series presenting 50 dividend growth stocks that I have screened for current fair value. With this article I will be covering 10 additional dividend growth research candidates with moderate to higher yields in addition to the initial 20 that I presented in part 1 found here and part 2 found here. This will be the last part of this series where I am primarily presenting dividend growth stocks with current dividend yields of 3% or better.
As I have been moving down the dividend yield curve, the reader might notice that both historical and estimated earnings growth and/or cash flow growth will be higher on many of these companies. Therefore, there will be several candidates in this group that I believe can generate above-average total long-term returns in addition to consistent dividend growth. Nevertheless, the future total return will be a function of the relative current valuation in conjunction with each company’s earnings and dividend growth potential.
The Ying and Yang of Valuation
Since this part 3 represents the middle of this five-part series I felt it would be only appropriate to provide insights into the opposite of fair or attractive valuation. On many occasions throughout this series I alluded to finding value in an otherwise generally overvalued market. Therefore, I offer the following earnings and price correlated FAST Graphs on the S&P 500.
For those not familiar with FAST Graphs there are three important lines on the graph that I would like to focus the reader’s attention on. The first two lines (orange and dark blue) represent important valuation references.
The orange line is generated based on a widely accepted formula for valuing a business – or in this case the S&P 500. What’s important to note is that the orange line on this graph is calculated as a P/E ratio of 15.To be clear, each year’s earnings reported at the bottom of the graph are plotted as a multiple of 15. Therefore, the orange line is a P/E ratio of 15 across the entire graph. This reference line is offered as a theoretical fair or optimum value calculation.
The dark blue line is essentially a normal P/E ratio calculated as a trimmed average over this timeframe. Trimmed average simply means that one high and one low valuation is removed to normalize this valuation reference.However, please note that the normal P/E is exaggeratedly high due to the initial high valuations. The dark blue color-coded rectangle in the “FAST FACTS” boxes to the right of the graph indicate that the dark blue line (the normal P/E ratio that the market has applied over this timeframe) is drawn as a historically normal multiple of 18.5.