Author’s Note: This is our monthly series on dividend stocks, usually published in the first week of every month. We scan the universe of roughly 7,500 stocks listed and traded on U.S. exchanges and use our proprietary filtering criteria to select five relatively safe stocks that may be trading cheaper compared to their historical valuations. Some of the sections in the article, like “Selection Process/Methodology,” are repeated each month with few changes. This is intentional as well as unavoidable, as this is necessary for the new readers to be able to conceptualize the process. Regular readers of this series could skip such sections to avoid repetitiveness.

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The year 2023 ended on a very high note for the markets. The S&P 500 gained nearly 26% for the year; the Nasdaq index did even better. The final push in the month
of December was mostly on the hopes of multiple rate cuts by the Fed in 2024, and the market may get its wish fulfilled. The worries about a recession have mostly faded away. However, the market is always full of surprises, and it often finds ways to act differently than most people expect.

Nonetheless, to be a successful investor, fortunately, we do not need to know exactly where the market is going. We believe it is not possible to catch the exact bottom (or the peak), so it is best to invest regularly and consistently in good, solid dividend-paying stocks when their valuations are attractive. Against this backdrop, keeping some cash reserves and dry powder ready to deal with any scenario is important.

The main goal of this series of articles is to shortlist and highlight companies that have a solid history of paying and raising dividends. In addition, we demand that these companies support strong fundamentals, carry low debt, and are offered at a relatively cheaper valuation. These DGI stocks are not going to make anyone rich overnight, but if your goal is to attain financial freedom by owning stocks that would grow dividends over time, meaningfully and sustainably, then you are at the right place. These lists are not necessarily recommendations to buy but a short list of probable candidates for further research. The purpose is to keep our buy list handy and dry powder ready so we can use the opportunity when the time is right. Besides, every month, this analysis is able to highlight a few companies that otherwise would not be on our radar.

Every month, we start with roughly 7,500 stocks that are listed and traded on U.S. exchanges, including over-the-counter (OTC) networks. Using our filtering criteria, the initial list is quickly narrowed to roughly 700 stocks, mostly dividend-paying and dividend-growing. From thereon, by using various data elements, including dividend history, payout ratios, revenue growth, debt ratios, EPS growth, etc., we calculate a “Dividend Quality Score” for each stock that measures the relative safety and sustainability of the dividend. In addition to dividend safety, we also seek cheaper valuations. We also demand that the selected companies have an established business model, solid dividend history, manageable debt, and investment-grade credit rating.

This month, we highlight three groups with five stocks each that have an average dividend yield (as a group) of 3.42%, 5.46%, and 7.30%, respectively. The first list is for conservative and risk-averse investors, while the second is for investors seeking higher yields but still wanting relatively safe dividends. The third group is for yield-hungry investors but comes with an elevated risk, and we urge investors to exercise caution.

Notes: 1) Please note that when we use the term “safe” in relation to stocks and investments, it should be interpreted as “relatively safe” because nothing is absolutely safe in investing. Even though we present only 5 to 10 stocks in our final list, one should have 15-20 stocks at a minimum in a well-diversified portfolio.

2) All tables in this article are created by the author unless explicitly specified. The stock data have been sourced from various sources such as Seeking Alpha, Yahoo Finance, GuruFocus, and CCC-List (drip investing).

The Selection Process

Note: Regular readers of this series could skip this section to avoid repetitiveness. However, we include this section for new readers to provide the necessary background and perspective.

Goals:

We start with a fairly simple goal. We want to shortlist five large-cap companies that are relatively safe, dividend-paying, and trading at relatively cheaper valuations compared to the broader market. The objective is to highlight some of the dividend-paying and dividend-growing companies that may be offering juicy dividends due to a temporary decline in their share prices. The excess decline may be due to an industry-wide decline or one-time setbacks like negative news coverage or missing quarterly earnings expectations. We adopt a methodical approach to filter down the 7,500-plus companies into a small subset.

Our primary goal is income that should increase over time at a rate that at least beats inflation. Our secondary goal is to grow the capital and provide a cumulative growth rate of 9%-10% at a minimum. These goals are, by and large, in alignment with most retirees, income investors, and DGI investors. A balanced DGI portfolio should keep a mix of high-yield, low-growth stocks along with some high-growth but low-yield stocks. That said, how you mix the two will depend upon your personal situation, including income needs, time horizon, and risk tolerance.

A well-diversified portfolio would normally consist of more than just five stocks and preferably a few stocks from each sector of the economy. However, in this periodic series, we try to shortlist and highlight just five stocks that may fit the goals of most income and DGI investors. But at the same time, we try to ensure that such companies are trading at attractive or reasonable valuations. However, as always, we recommend you do your due diligence before making any decision on them.

Selection Criteria:

The S&P