The US stock market is at all-time highs right now. It just continues to hit new high after new high.
I’ve been investing for more than a decade now, and you know what I’ve learned?
Don’t bet against the US stock market.
Despite all of the concerns in the world on any given day, US businesses are incredibly resilient and profitable. And that means higher stock prices over the long run.
That’s especially true for high-quality dividend growth stocks. I’m talking about stocks that pay reliable, rising dividends. Because the underlying businesses are producing reliable, rising profits.
The US stock market is a money machine, and high-quality dividend growth stocks tend to be some of the best components within that machine.
That said, it’s also not a great idea to follow lemmings off a cliff and buy overvalued stocks that are ripe for a fall. So what’s an investor to do?
Well, taking a look at stocks that are well off of their 52-week highs isn’t a bad start.
If they’ve already been beaten up for one reason or another, that could potentially provide you with some upside potential as the names recover.
Today, I want to share with you three dividend growth stocks that are 25% or more off of their respective 52-week highs.
Ready? Let’s dig in.
DGI Down Stock #1: CMC Materials (CCMP)
The first stock that’s well off of its 52-week high is CMC Materials (CCMP). CMC Materials is a materials company with a market cap of over $3 billion.
This is an interesting name that’s perhaps too big to be a small cap but also very small for a mid cap. You don’t often see companies of this size paying out growing dividends, but CMC Materials bucks the trend.
They’ve increased their dividend for six consecutive years.
With a three-year DGR of 29.6% and a yield of 1.5%, the scale tilts more toward growth than yield with this stock. But the dividend they pay is very safe. They paid out about $40 million in total dividends over the last nine months, while free cash flow over that period came in at over $148 million. The strong dividend growth has come from a lot of business growth – revenue and EPS have both more than doubled over the last decade.
This stock is down almost 40% from its 52-week high!
The 52-week high is $254.34. The stock is currently priced around $155. This stock probably got way ahead of itself earlier this year, but if you didn’t buy in at the highs, buying in closer to lows could be advantageous for you. Their last quarter showed 12.7% YOY revenue growth, so it’s not like the business has fallen off a cliff. Most basic valuation metrics are significantly lower than their respective recent historical averages, so this is a name to take a look at.
DGI Down Stock #2: Calavo Growers (CVGW)
The second dividend growth stock I want to highlight is Calavo Growers (CVGW). Calavo is an international consumer goods and farm products company with a market cap of almost $1 billion.
This company is primarily in the avocado distribution business. The stock is firmly in the small cap zone, which could be why it flies under the radar. Even though it’s a rather small company, it does pay an attractive dividend that’s been growing nicely.
This company has increased its dividend for nine consecutive years.
The stock yields 2.2% to go along with the five-year DGR of 7.5%. These are pretty solid numbers. The yield easily beats the market. And the high-single-digit dividend growth rate easily beats inflation. The one thing that’s perhaps a bummer about the dividend is that it’s paid annually rather than quarterly. GAAP EPS can fluctuate wildly, but FCF does currently cover the dividend handily. This last fiscal year walloped results, but I’ll note that revenue still doubled over the last 10 years. And if we back things up one year, the nine-year CAGR for EPS is nearly 14%. Good numbers.
The stock is down nearly 40% from its 52-week high right now!
Talk about a fire sale. This thing has been thrown out faster than a bad avocado. Its 52-week high is $85.40. Shares are now trading hands for around $52. Most basic valuation metrics show a deep discount here in terms of valuation. Its five-year average yield, for example, is 1.4%, so the current yield is 80 basis points higher than that. If you’re looking for a unique small cap stock that’s well off of its highs, this is a name worth considering.
DGI Down Stock #3: Choiceone Financial Services (COFS)
Last but not least, let’s talk about Choiceone Financial Services (COFS). Choiceone is a community bank with a market cap of less than $200 million.
This small bank doing business in Western Michigan naturally features more risk than a global megabank. But you could make an argument that investors buying today are being compensated with a nice yield and low valuation. Plus, the dividend continues to grow like clockwork.
This bank has increased its dividend for nine consecutive years.
The stock yields 3.6%, which blows away the market and most other banks. The five-year DGR of 6.5% certainly gets the job done when you’re getting a yield like that. And the payout ratio of 35.8% gives one no pause when it comes to dividend safety. The bank’s revenue has tripled over the last decade, while EPS has more than doubled over that time frame. The growth here has not been lackluster.
This stock has been hammered this year, down more than 25% from its 52-week high.
The 52-week high is $32.80, but the stock is now priced at less than $25. So we’re talking a major correction in this name. Every basic valuation metric is screaming “cheap”! For instance, the P/B ratio is only 0.8. Almost every bank I know of is above 1. This stock’s five-year average P/B ratio is 1.2. If you’re willing to take the risk on a small community bank, this is a compelling dividend growth stock offering an above-average yield at a below-average valuation.
— Jason Fieber
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