Top 10 Dividend Growth Stocks For March 2023
Investment Thesis
When investing for the long-term, dividend growth companies can be particularly attractive for investors. This is because they help raise additional income in the form of dividends year over year. Therefore, I have selected the top 10 dividend growth stocks of this month that I consider particularly attractive for investors.
Selection Process
The selection process can be divided into four parts:
Step 1: Analysis of the Financial Ratios
In the first step, companies must meet the following requirements to be part of a pre-selection, which I will then select the top dividend growth stocks of the month from:
Market Capitalization > $15B
Payout Ratio < 60%
Average Dividend Growth Rate over the past 5 Years > 5%
Dividend Yield [FWD] > 0%
P/E [FWD] Ratio < 50
EBIT Margin [TTM] > 5% or Net Income Margin [TTM] > 5%
Return on Equity > 5%
Moody’s credit rating: at least B
I consider these metrics to be important in making well-founded investment decisions and increasing the probability of good results.
A low payout ratio ensures that the company has sufficient room for future dividend enhancements, particularly important for dividend growth investors who aim to invest with a long investment horizon. At the same time, a low payout ratio reduces the probability of a future dividend cut, which could lead to the stock price declining significantly in a short period of time.
A high dividend growth rate of more than 5% over the past 5 years increases the probability of the company being able to raise its dividend significantly in the following years.
A P/E [FWD] Ratio of less than 50 means that the growth expectations priced into the stock price of the company you aim to invest in are not extraordinarily high. This helps reduce the risk of the share price decreasing significantly in a short period of time if the growth expectations for the company are not met.
An EBIT Margin or Net Income Margin of more than 5% and a Return on Equity of more than 5% help filter out unprofitable companies.
A credit rating from Moody’s of at least B serves as an additional indicator of a company's financial strength.
Step 2: Analysis of the Competitive Advantages
In the second step, the companies’ competitive advantages, such as brand image, innovation, technology, and economies of scale, are analyzed to make a narrower selection. Companies with strong competitive advantages are more likely to stand out against the competition in the long term. Companies without strong competitive advantages have a higher probability of going bankrupt one day, representing a strong risk for investors to lose their invested money.
Step 3: Valuation of the Companies
In the third step, I will dive deeper into the valuation of the companies.
To conduct the valuation process, I use different methods and criteria, such as the companies’ current valuation as according to my DCF model, the expected compound annual rate of return as according to my DCF model, and/or a deeper analysis of the companies’ P/E [FWD] Ratio. These metrics serve as an additional filter to only select companies that currently have a reasonable valuation and potential for long-term growth.
The Discounted Cash Flow (DCF) method is a widely used valuation approach that estimates the intrinsic value of a company based on its projected future cash flows. By discounting these future cash flows to present value, the DCF model can provide an estimated fair value of the company. I use this method to assess the companies' current valuations and their expected compound annual rate of return.
Moreover, I also analyze the companies' P/E (FWD) Ratio, which is a commonly used valuation metric that compares a company's stock price to its earnings per share (EPS) estimate for the next twelve months. This analysis allows me to evaluate whether a company's current stock price is justified by its earnings potential.
Overall, through a thorough analysis of these valuation methods and criteria, I can select companies that have strong potential for long-term growth and are currently trading at a reasonable valuation.
1. Apple has consistently been a top performer in the technology industry, and its inclusion in this list of dividend growth stocks for March 2023 is no surprise. Despite being the world's leading company in terms of market capitalization and brand value, Apple continues to offer strong dividend growth potential for investors. The company's high EBITDA Margin [TTM] of 32.33% is a testament to its strong competitive advantages, and it is 227.71% higher than the sector median (9.87%). In addition, Apple's Total Return of -3.11% over the past 12 months is superior to the Total Return of the S&P 500 within the same time period (-8.73%), indicating its resilience to economic crises.
2. Bank of America's inclusion in this list of dividend growth stocks for March 2023 is also well-founded. With a Net Income Margin of 29.97%, which stands 11.62% above the sector median, the bank has proven to be an excellent choice when it comes to profitability. Furthermore, the bank's current P/E [FWD] Ratio of 8.04 is 33.86% below its average of the past 5 years (12.16), making it an attractive option in terms of valuation. The bank's dividend growth rate of 14.87% over the past 5 years further bolsters its position as a buy-rated stock.
3. BlackRock's strong financial performance and dividend growth potential also make it an excellent choice for investors looking to invest in dividend growth stocks in March 2023. The company's Net Income Margin of 28.97% is above the sector median of 26.69%, indicating its strong profitability. BlackRock's dividend yield [FWD] of 3.11% and Dividend Growth Rate of 13.60% over the past 5 years are evidence of its strong dividend growth potential. Furthermore, its P/E [FWD] Ratio of 18.43 is only slightly below its average of the past 5 years (19.16), indicating that the company is at least fairly valued.
4. Caterpillar is a construction and mining equipment manufacturer founded in 1925. The company has been named among Barron's 100 most sustainable US companies. With a market capitalization of $116.14 billion, Caterpillar's P/E ratio of 14.40 is 20.95% below the sector median. Moreover, its P/E ratio is 20.12% below its average from the past five years, indicating that the company is undervalued at its current price levels. Caterpillar is a great pick for investors looking for dividend growth, with an attractive dividend yield of 2.18%, a low payout ratio of 33.96%, and an average dividend growth rate of 8.66%. The company is rated with an A+ in terms of dividend consistency and an A- for dividend growth by Seeking Alpha Dividend Grades. It is rated with a B+ for dividend safety and a B for dividend yield.
5. JPMorgan is one of the safest and most diversified banks in the world. Its strong competitive advantages, high profitability, and attractive valuation make it a top pick among dividend growth companies. With a P/E ratio of 9.83, JPMorgan is undervalued, standing 20.71% below its average P/E ratio over the past five years. Its price/book ratio of 1.31 is 14.54% below its average from the last five years. JPMorgan's dividend growth rate of 16.09% over the past 10 years indicates that it is a great pick for dividend growth investors and shows that the company is on track in terms of growth. Its dividend growth rate of 13.54% over the past five years is higher than its competitors in the Diversified Banks Industry. In a previous analysis on the US Banks Industry, JPMorgan was selected as the top pick.
6. Merck & Co is a worldwide operating health care company with a market capitalization of $268.71 billion. It pays shareholders a dividend yield of 2.76% and has been able to raise its dividend by 9.41% on average over the last five years. Merck & Co's EBITDA margin of 41.08% is significantly over the sector median, indicating the competitive advantages it has over its competitors. With a P/E ratio of 16.82, 36.24% below the sector median, the company is part of the selection of dividend growth stocks to invest in for March 2023. Its current valuation is below that of competitors such as Johnson & Johnson and Novartis.
7. Microsoft is a technology company that has shown a dividend growth rate of 9.92% over the past five years. Its return on equity of 39.91% and Aaa credit rating by Moody's demonstrate its enormous financial strength. Microsoft's current P/E ratio of 29.46 is in line with its average over the past five years, indicating that the company is at least fairly valued at the moment. With an EBITDA margin of 47.99%, Microsoft is ahead of its competitors when it comes to profitability.
8. Tencent is an investment holding company founded in 1998 with a market capitalization of $411.85 billion. Its EBIT margin of 18.26%, 116.52% above the sector median, demonstrates the company's strong competitive position compared to its peers. Tencent's dividend growth rate of 21.
9. The company United Parcel Service, which operates in the Air Freight and Logistics Industry, has a Market Capitalization of $160.02B. It has a strong competitive position, indicated by its EBIT Margin [TTM] of 13.74% which is 40.54% higher than the Sector Median of 9.78%. The company's EBIT Margin [TTM] has increased by 50% compared to its average over the past 5 years (9.16%), showing significant profit growth in recent years.
With a P/E [FWD] Ratio of 15.98, 12.27% lower than the Sector Median, and a Dividend Yield [TTM] of 3.37%, 104.95% higher than the Sector Median of 1.64%, the company appears to be at least fairly valued, if not undervalued. Additionally, its Dividend Yield [FWD] of 3.53% is higher than that of its competitor FedEx (NYSE:FDX) with a Dividend Yield [FWD] of 2.13%.
10. Visa, a company that I personally consider as one of my favorite dividend growth companies, has strong competitive advantages such as its brand image, high number of debit and credit cards, and distribution network. It also has enormous profitability and a wide economic moat. The company's P/E [FWD] Ratio of 26.65 is 17.67% below its average over the past 5 years, indicating an attractive valuation.
Visa's Revenue Growth Rate [FWD] of 14.22% is 104.69% higher than the Sector Median (6.95%), and its EBITDA Margin [TTM] of 70.09% is higher than its competitors such as Mastercard (NYSE:MA) with an EBITDA Margin [TTM] of 60.14% and PayPal's (NASDAQ:PYPL) EBITDA Margin [TTM] of 17.92%.
Conclusion
In conclusion, dividend growth investing can be a smart long-term investment strategy for investors looking to generate additional income in the form of dividends year over year. By carefully selecting dividend growth stocks based on their financial ratios, competitive advantages, valuation, and diversification over industries, investors can increase the probability of achieving good investment results.
In this article, I presented my top 10 dividend growth stocks for March 2023 based on my selection process. These stocks have shown an average dividend growth rate of 12.92% over the past 5 years, have a low payout ratio, are highly profitable, and are also attractive in terms of valuation. However, it's important to note that this is not a recommendation to buy these stocks, and investors should conduct their own due diligence before making any investment decisions.
FAQs
1. What is dividend growth investing, and how does it work?
Dividend growth investing is a long-term investment strategy where investors focus on buying stocks in companies that consistently increase their dividend payments over time. This strategy aims to generate a reliable stream of income in the form of dividends year over year.
2. What are the benefits of dividend growth investing?
The benefits of dividend growth investing include the ability to generate additional income in the form of dividends, the potential for capital appreciation, and the ability to compound your returns over time.