High-Quality Dividend Stocks (2024)

I've been using a slightly modified version of David Van Knapp's quality scoring system to assess the quality of dividend growth [DG] stocks. My approach has been to grab a list of dividend growth stocks and to determine quality scores for stocks in the list. Additionally, the modifications I made to the scoring system allowed me to rank the stocks.

The top-ranked DG stocks in the Dividend Aristocrats are Johnson & Johnson (JNJ), Procter & Gamble (PG), and Automatic Data Processing (ADP). These stocks have perfect quality scores of 25 out of a possible 25 points. I also ranked the Dividend Kings, which are companies that have increased their dividend payouts for at least 50 consecutive years. JNJ and PG are the only Dividend Kings with perfect scores.

For my July DivGro Pulse article, I ranked all the DG stocks in the popular Dividend Champions list. The list contains nearly 900 stocks listed on exchanges in the United States that have paid higher dividends every calendar year for at least five consecutive years. In my Pulse article, I presented quality scores and rankings for all the stocks in my DivGro portfolio.

The top-ranked stocks in my portfolio are JNJ, Microsoft (MSFT), Merck (MRK), PG, Visa (V), and ADP, all earning perfect quality scores of 25. I identified two other stocks with perfect scores, Oracle (ORCL) and Nike (NKE), which I recently added to my portfolio.

These exercises were tremendously useful and I'm planning to repeat them from time to time, but it

occurred to me that I could also use the quality scoring system to find high-quality stocks. This article explains how I went about finding high-quality dividend stocks and presents the highest-quality stocks for consideration.

Dividend Stock vs Dividend Growth Stocks

I distinguish dividend stocks from dividend growth stocks by not requiring regular dividend increases. A few stocks in my portfolio are dividend stocks rather than dividend growth stocks. For example, after CVS Health (CVS) failed to extend its 14-year streak of annual dividend increases in 2018, I relabeled the stock as a dividend stock.

Of course, requiring regular dividend increases is a fuzzy distinction. I'm not aware of a standard definition of dividend growth stocks, but the definition used by the Dividend Champions list provides a handy basis.

To be included in the Dividend Champions list, a stock's annual split-adjusted dividend payout in US dollars must be consistently increasing and for at least the past five years running. Additionally, the list covers only stocks listed on exchanges in the United States. Note the requirement in US dollars, which, unfortunately, excludes stocks that pay increasing dividends in a foreign currency but not necessarily in US dollar terms.

A reasonable definition of dividend growth stocks would remove the US-centric components. So, a dividend growth stock is a stock with increasing split-adjusted dividend payouts every year for at least the past five years.

And, for completeness, I define dividend stocks as stocks that regularly pay dividends, whether monthly, quarterly, semi-annually or annually. I have no interest in stocks that occasionally pay dividends, so those are excluded from my definition of dividend stocks.

Recap of Quality Scoring System

The quality scoring system employs five widely used quality indicators from independent sources and assigns 0-5 points to each quality indicator, for a maximum of 25 points. I call the total score a stock's quality score.

Here are the quality indicators used in determining a stock's quality score:

• Value Line [VL] Safety Rank
• Value Line [VL] Financial Strength ratings
• Morningstar [M*] Economic Moat
• Standards & Poors's [S&P] Credit Rating
• Simply Safe Dividends [SSD] Dividend Safety Scores

You can read about these quality indicators by following the provided links.

Here is the scoring system and the color-coding scheme used in determining quality scores:

Modified versions of David Van Knapp's quality scoring system and color-coding scheme.

My modifications include assigning 3 points to companies that don't have an S&P Credit Rating but carry no debt. In order to rank stocks, I break ties by considering the following factors, in turn:

• Dividend Safety Score
• S&P Credit Rating
• Dividend Yield

I use a similar color-coding scheme than in the original article, though I differentiate perfect scores.

Finding Quality Dividend Stocks

As mentioned earlier, it occurred to me that I could also use the quality scoring system to find high-quality stocks.

The approach is "constructive". Essentially, I choose the acceptable levels for each quality indicator and screen for matching stocks. I can do so most easily for the quality indicators from VL and SSD. Then, stocks that pass these screens can be checked against the M* and the S&P quality indicators, in turn.

Here are my criteria:

1. SSD Dividend Safety Scores :: Very Safe and Safe
2. VL Safety Rank :: 1 and 2
3. VL Financial Strength :: A++, A+, and A.
4. M* Economic Moat :: Wide and Narrow
5. S&P Credit Rating :: AAA, AA+, AA, AA–, A+, A, and A–

I found 646 stocks with Very Safe and Safe dividend safety scores, 449 stocks with safety ranks of 1 and 2, and 418 stocks with financial strength ratings of A++, A+, or A. Only 225 stocks appear in all three lists. Of these, 196 stocks have Wide and Narrow economic moats.

The most time-consuming step was to check for S&P credit ratings of A– or better. My source is FASTGraphs, which requires loading each ticker, in turn, to view the data in a sidebar under Company Information. (If anyone has a faster way of finding S&P credit ratings, I'd love to hear from you!).

In all, 102 stocks match all five of my selected criteria and qualify to be in the category of the highest-quality stocks according to the quality scoring system:

Eight of these stocks have perfect scores and, to my surprise, ORCL was replaced by a stock that is not a member of the Dividend Champions list! (ORCL now has an A+ credit rating, so its quality scored dropped to 24).

Below, I'll present the top 36 dividend stocks by quality score, along with key metrics and fair value estimates.

Key Metrics and Fair Value Estimates

In addition to quality indicators and quality scores, I provide columns with key metrics of interest to dividend growth investors, including years of consecutive dividend increases (Yrs), dividend Yield for a recent Price, and 5-year compound annual dividend growth rate (5-Yr DGR).

Furthermore, I provide a fair value estimate (Fair Val.) to help identify stocks that trade at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of the recent price to the fair value estimate.

To estimate fair value, I reference fair value estimates and price targets from several sources:

• Morningstar: fair value estimate based on discounted cash flow analysis
• Finbox.io: fair value estimate based on several financial models
• Finbox.io: average of analyst targets
• Value Line: average of target range

Additionally, I estimate fair value using the 5-year average dividend yield of each stock using data from Simply Safe Dividends:

fair value estimate = recent price × dividend yield ÷ 5-year average dividend yield

With five estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.

Dividend Stocks with Perfect Quality Scores

As mentioned earlier, eight stocks have perfect scores but ORCL no longer is one of them. However, I found another dividend stock with a perfect score, Nestlé SA (OTCPK:NSRGY).

Nestlé SA was founded in 1866 and is headquartered in Vevey, Switzerland. It is the largest food company in the world, measured by revenues and other metrics, since 2014. Nestlé SA's products include baby food, medical food, bottled water, breakfast cereals, coffee and tea, confectionery, dairy products, ice cream, frozen food, pet foods, and snacks.

Nestlé SA has a primary listing on the SIX Swiss Exchange and trades over-the-counter in the USA as ADRs under the symbol NSRGY.

NSRGY was removed from the Dividend Champions list in April 2015 when changes in currency exchange rates caused its dividend to decrease in US$ terms. But with 23 consecutive years of higher dividend payments, certainly, NSRGY deserves to be called a dividend growth stock!

The stock is trading at a premium to fair value, confirmed by the following FASTGraphs chart:

Regardless, I opened a small position in NSRGY, which should help me track the stock more closely with the view of adding shares at a more favorable price. Normally, I'd wait for a better entry point, but in this case, I'm comfortable making an exception.

Three other stocks are trading at premium valuations, PG, V, and ADP. These are all stocks I already own. They would have to drop significantly before I'd be interested in buying more shares.

I also own JNJ, MSFT, MRK, and NKE, which all are trading just below fair value. I think I'll wait for better deals on those positions, too. I'm looking to buy JNJ below $122, MSFT below $123, MRK below $78, and NKE below $74.

Dividend Stocks with a Quality Score of 24

The stocks in this section missed a perfect score on only one of the quality indicators.

I own stocks highlighted in the Tickercolumn.

The following stocks do not appear in the Dividend Champions list:

Novo Nordisk A/S (NVO) is a healthcare company based in Bagsvaerd, Denmark. The company's Diabetes Care and Obesity segment provides products in the areas of insulins, GLP-1 and related delivery systems, oral anti-diabetic products, obesity, and other chronic diseases. Its Biopharmaceuticals segment offers products in the areas of hemophilia, growth disorders, and hormone replacement therapy.

NVO and is a dividend growth stock with a streak of 22 consecutive annual dividend increases. NVO was removed from the Dividend Champions list in March 2015 due to the effect of currency exchange rate changes on its dividend payments in US$.

Founded in 1973 and headquartered in Paris, France, Sanofi (SNY) is a global biopharmaceutical company providing therapeutic solutions for people with health problems. The company supplies vaccines and provides various treatments to fight pain and to ease suffering, targeting rare diseases as well as long-term chronic conditions. The company has an alliance with Verily Life Sciences.

As far as I can determine, SNY never was in the Dividend Champions list. However, the stock has raised its dividend for 19 straight years, so it certainly is a dividend growth stock.

Deere (DE) manufactures and distributes agriculture, equipment, construction, and forestry equipment worldwide. The company operates in three segments: Agriculture and Turf, Construction and Forestry, and Financial Services. It markets its products through independent retail dealer networks and retail outlets. DE was founded in 1837 and is based in Moline, Illinois.

DE was removed from the Dividend Champions list in September 2016 after it failed to extend its dividend increase streak to 13 years. However, the company resumed with dividend increases in May 2018, so we'll see how if the company can earn its way back onto the Dividend Champions list.

Novartis AG (NVS) provides healthcare products worldwide. The company operates in three segments: Innovative Medicines, which offers prescription medicines for patients and healthcare providers; Sandoz, which provides active ingredients and finished dosage forms of pharmaceuticals; and Alcon, involved in the treatment of ocular conditions. NVS was founded in 1895 and is headquartered in Basel, Switzerland.

NVS was dropped from the Dividend Champions list in April 2013 due to the impact of currency exchange rate changes on its US$ equivalent dividend payments. Note that NVS cut its dividend last year.

While these stocks all are trading at a discount to fair value, I'm not really looking to open new positions at this time. Perhaps SNY might be interesting to look into, though.

The following stocks are stocks I don't own but that are in the Dividend Champions list:

Eli Lilly (LLY) offers endocrinology products for the treatment of diabetes, osteoporosis, human growth hormone deficiency, and pediatric growth conditions. The company also provides neuroscience, immunology, oncology, and cardiovascular products. LLY was founded in 1876 and is headquartered in Indianapolis, Indiana.

LLY's discount is not quite enough to persuade me to become a shareholder. However, I'm willing to buy LLY for $85 per share on or before 17 January 2020, so I sold a put and collected options income of $105 in the process. Should the put be exercised, I'll buy 100 shares of LLY at an effective cost basis of $83.95.

Colgate-Palmolive (CL) is a consumer products company, whose products are marketed in more than 200 countries and territories throughout the world. The company operates in two product segments: Oral, Personal and Home Care; and Pet Nutrition. CL was founded in 1806 and is headquartered in New York, New York.

CL is trading at about fair value and I'm willing to open a position below $65 per share. Last month, I sold two $65 put options on CL and collected $247 of options income. Should the options be exercised on or before 15 November 2019, I'll buy 200 shares of CL at an effective cost basis of $63.77 per share.

Walmart (WMT) is the world's largest retailer and the biggest private employer in the world. Based in Bentonville, Arkansas and founded in 1962, the company is a multinational retailer with more than 11,000 stores worldwide. Additionally, the company operates e-commerce websites in many countries.

I used to own WMT but closed my position in January 2019 due to the stock's declining dividend growth rate. But it seems like WMT's growth prospects are improving, so I'm reconsidering my stance. Last month, I sold one $100 put with a 20 December expiration date. If exercised, I'll buy 100 shares of WMT at an effective cost basis of $97.88 per share.

The following stocks are stocks I own that are discounted by at least 10% to my fair value estimate:

Having increased the number of positions in my DivGro portfolio to 94, the average position size dropped to 1.07% of total portfolio value. With the exception of Exxon Mobil (XOM), all these positions are above-average positions:

Not only will adding to my XOM position decrease my average cost basis, but XOM's yield is quite attractive and well above the 5-year average yield for the stock:

Source: Simply Safe Dividends

I decided to double my XOM position. Given that the stocks I'm presenting in this article have very high quality scores, I'm quite willing to accommodate higher-than-average positions.

Note that my positions in 3M (MMM) and Pfizer (PFE) are both "underwater", so adding shares would reduce the average cost basis of both positions.

Investors are concerned that MMM has delivered five consecutive quarterly misses and also lowered guidance, so the stock is down 27% from its 52-week high. The company is executing a new restructuring plan that will cut the company's global workforce by about 2% and cut capital expenditure while continuing to invest heavily in research and development programs. Time will tell how successful this restructuring plan will be. I expect a lower dividend growth rate and continued pressure on the stock's price. So I'm waiting for an even better entry point.

PFE agreed to spin off its off-patent branded drugs business and combine it with generic drugmaker Mylan NV (MYL) to form a new company. PFE will likely cut its dividend and remains unclear if the new company will pay a dividend that will match PFE's dividend cut. This uncertainty could be providing an investment opportunity, though key risks remain, including the threat of regulatory intervention. Again, I want to wait for an even better entry point.

Raytheon (RTN), UnitedHealth (UNH), and Intel (INTC) are three of DivGro's nineteen home run stocks, a designation I give to any stock in my portfolio that crosses the 100% mark in total returns. (Once a position achieves home run status, it retains that status even if the stock price drops or I buy additional shares at a higher cost basis). Along with Chevron (CVX), these stocks seem to offer solid investment opportunities:

The following stocks are stock I own that are trading below fair value, but are not discounted by at least 10%:

Recently, I opened a small position in ORCL (only 0.16% of total portfolio value) and I'll be looking for opportunities to add shares in the near future, hopefully at an even better valuation than currently is available.

Medtronic (MDT) at 0.63%, Cisco Systems (CSCO) at 0.64%, and Union Pacific (UNP) at 0.82% are smaller-than-average positions in my portfolio and I'll look for good entry points to increase these positions.

The remaining stocks are larger-than-average positions, so unless I can get exceptional discounts, I'm not buying here. General Dynamics (GD) is recovering slowly after it took quite a tumble at the end of 2018. Home Depot (HD), on the other hand, is trending lower. Perhaps a more favorable entry point will present itself soon.

Finally, for completeness, here are the stocks I own that are trading at a premium to fair value:

Mastercard (MA), Stryker (SYK), PepsiCo (PEP), and Accenture (ACN) are smaller-than-average positions in my portfolio, but I'll have to wait for much lower prices before adding to these positions. Particularly ACN, SYK, and MA are trading at hefty premiums.

Honeywell International (HON), Walt Disney (DIS), Texas Instruments (TXN), and Lockheed Martin (LMT) are larger-than-average positions in my portfolio. In fact, DIS is the largest position in my portfolio at 3.36% of total portfolio value. These are great stocks but there are other great stocks with better valuations available, so I'm not looking to add to these positions now.

Concluding Remarks

I've been using David Van Knapp's quality scoring system for a few months and it does a great job of identifying high-quality stocks. For this article, I used the quality scoring system to screen for stocks that match predetermined levels for each quality indicator. The article presented the top 36 ranked stocks.

Several high-quality stocks do not qualify for inclusion in the Dividend Champions list, but, for all intent and purposes, these are dividend growth stocks. NSRGY, NVO, and SNY are stocks of companies based outside the United States. Available on US exchanges as ADRs, these stocks pay growing dividends in foreign currency.

A few high-quality stocks are not dividend growth stocks, but dividend payers with long histories of uninterrupted dividend payments. NVS trades in the United States as an ADR and DE trades on the New York Stock Exchange. NVS recently cut its dividend, while DE froze its dividend for some years before resuming with dividend increases in 2018.

Thanks for reading and happy investing!

FerdiS