These 5 Dividend Growth Stocks Are Down More Than 20%

The market’s off to a rocky start in 2022. Volatility is here. But what do I always say? Short-term volatility is a long-term opportunity.

And I think all of this recent volatility has presented some great long-term opportunities. I don’t just mean that in terms of the market, either. I’m talking about many individual stocks.

Because while the S&P 500 is barely off of its all-time high, there are a lot of individual stocks that are way down.

And you know me. These aren’t random individual stocks. I’m referring to dividend growth stocks paying out reliable, rising dividends.

Since price and yield are inversely correlated, all else equal, a lower price results in a higher yield.

So buying after a big drop increases the yield you get at the time of purchase.

And you get to collect that fat, growing dividend income while you wait for the price to recover.

Today, I want to tell you about five dividend growth stocks that are down 20% or more from their respective 52-week highs. Ready? Let’s dig in.

The first dividend growth stock I want to highlight is Algonquin Power & Utilities (AQN).

Algonquin is a renewable energy and regulated utility conglomerate with a market cap of $12 billion Canadian.

Algonquin is a really interesting utility business. And they skirt a lot of issues that tend to plague a lot of legacy utility players. While a lot of major utility companies are pretty landlocked in terms of their geographic service area, Algonquin is spread out all over North America and beyond. So they’re not overly dependent on the growth of one particular area in order to grow their revenue base. And whereas many traditional energy generation products are being phased out, Algonquin is already ahead of the curve with significant exposure to renewables. So that’s a great one-two punch. And this should allow the company to continue growing the dividend for years to come.

The utility company has already increased its dividend for 13 consecutive years.

The 10-year dividend growth rate of 9.6% is impressive in and of itself. But it’s even more impressive when you see that you’re pairing that growth with the stock’s starting yield of 4.9%. I mean, a near-5% yield and near-double-digit dividend growth. That’s a rare combination. The company reports results in a funky way for a utility, largely because of its unique structure. But adjusted funds from operations are easily covering the dividend, which is why they increased the dividend by 10% back in May.

Despite the big yield and big dividend growth, this stock has been left for dead. It’s down 22% from its 52-week high.

The crazy thing is, the stock didn’t even look all that expensive at the 52-week high of $17.86. It’s just that it’s even more appealing now that it’s within pennies of its 52-week low, currently priced at right about $14.00. Indeed, the stock looks attractively valued. That aforementioned 4.9% yield is 60 basis points higher than its five-year average. The forward P/E ratio is below 20. For a normal utility, that’s nothing special. However, when you consider the exposure to renewables and water assets, that’s actually quite remarkable. Take a look at this name, if you haven’t already.

Next up, let’s talk about Bank of South Carolina (BKSC).

Bank of South Carolina is a local bank company with a market cap of $113 million.

There are a lot of small, local banks being run all over the United States. And many of them are really fine businesses that have operated spectacularly for decades. There’s a good deal of risk when investing in a company with a market cap this small, so one has to be aware of that. But there’s also reward to be had, which includes a big dividend growing at a high rate.

The bank has increased its dividend for 11 consecutive years.

And check this out. The stock yields 3.4%. That’s high by any measure. It’s high against the market, high against most dividend growth stocks in general, and high against almost any other bank. Bu wait, there’s more. This bank also routinely declares special dividends, which is on top of that normal 3.4% yield. Also, the 10-year dividend growth rate is a respectable 7.2%. And with a moderate 55.3% payout ratio, the dividend has plenty of room to head higher.

This stock is 21% off of its 52-week high, and that could be the opening you need.

The bank is trading hands for a bit over $20/share, which is much lower than the 52-week low of $25.65. Now, this is a small bank. Let’s be aware of the risks. But the company has steadily grown its revenue, profit, and dividend for years and years. So they’re doing a lot of things right in their community. Meantime, a lot of basic valuation metrics are in line with, or slightly lower than, their respective recent historical averages. Perhaps surprisingly, this bank has typically commanded a premium – the five-year average P/B ratio is 2.2. The current P/B ratio is 2.1. So there’s a small gap there. Maybe this stock shouldn’t have run up to its 52-week high, but it sure looks a lot better down around the $20/share area.

I now want to tell you about Erie Indemnity (ERIE).

Erie Indemnity is a property-casualty insurance company with a market cap of $9 billion.

I’ve said many times now that insurance is one of my favorite business models. You have a captive customer that often quite literally can’t go without the product. And because there’s a severe lag between premiums collected and claims paid, insurance companies are able to build up a sizable float and make money from other people’s money in a low-risk, low-cost way. It’s ingenious. And this is why many insurance companies are perfectly geared for safe, growing dividends.

This insurance company has increased its dividend for 32 consecutive years.

Like I said, the insurance business model is just geared for this stuff, which, as a dividend growth investor, is music to my ears. The stock yields 2.3%, which easily beats the market. And the 10-year dividend growth rate is 7.2%, which beats inflation. The one concern here might be the payout ratio. At 76.0%, that’s actually pretty high, particularly for an insurance company. Other than that, the dividend metrics are good.

This stock is shockingly 28% off of its 52-week high.

The 52-week high of $266.77 is in the rearview mirror, with shares currently priced at below $193/each. In my view, this is a case where the drop was warranted. It simply looked expensive at the 52-week high. But it’s become a lot more reasonable. The P/B ratio of 7.8 is decently off of its five-year average of 8.4. And the 2.3% yield is 10 basis points higher than its own five-year average. I’d actually like to see this stock fall a bit more. If it does, that’s when there could really be an opportunity. In the meanwhile, it’s a name to keep on the radar.

The fourth dividend growth stock to talk about is Innovative Industrial Properties (IIPR).

Innovative Industrial Properties is a real estate investment trust for the medical-use cannabis industry with a market cap of $5 billion.

I really like this business. It’s a pioneer in the medical-use cannabis industry, providing the industry with specialized industrial properties. When you’re a pioneer and you’re blazing the trail, there’s a lot of growth to be had. And grown they have, which includes the dividend.

The real estate investment trust has increased its dividend for five consecutive years.

This is a fairly new company – founded in 2016. So it’s not a surprise to see such a young dividend growth track record. But they’ve got the makings of an all-star dividend growth stock in a lot of ways. The yield of 2.8% is pretty high in this environment. And the three-year dividend growth rate is – get this – an astounding 70.6%. Really, really incredible growth. And because a lot of that dividend growth has been fueled by business growth, the dividend is secure. Their most recent quarter showed 33.6% YOY growth in AFFO/share. And AFFO/share for that quarter – Q3 FY 2021 – came in at $1.71, easily covering the $1.50 quarterly dividend.

This stock’s short-term weakness, with it down 26% from its 52-week high, could be a classic long-term opportunity.

The stock’s current price of right around $213 compares very favorably to its 52-week high of $288.02. Now, this isn’t a widows-and-orphans stock. This is a new player in a new industry. So if you’re averse to risk, stay away. But if you’re okay with taking on some risk, it’s a very, very interesting way to play the burgeoning cannabis industry. The yield easily beats the market, and the growth is outstanding. Meanwhile, the valuation, after the stunning drop, might not be pricing in all of that growth and potential. The P/CF ratio of 30.9 is higher than what a lot of stable triple net lease REITs are commanding, where you’re usually looking at a ratio of around 20. But those stable REITs are growing at a mid-single-digit rate. This company is growing almost ten times as fast. This company is at least worthy of consideration here, if not capital.

Last but not least, let’s have a conversation about Polaris (PII).

Polaris is a manufacturer of a range of motorcycles and all-terrain vehicles with a market cap of $7 billion.

With the pandemic spurring sudden interest in being outdoors, Polaris has been a big beneficiary of this. TTM EPS is almost twice as high as what EPS for FY 2019 was. Of course, Polaris has long been a great business selling some of the best all-terrain vehicles available in the market. And that’s allowed them to build up a fantastic track record for growing dividends.

Polaris has increased its dividend for 26 consecutive years.

So, yeah, this isn’t a pandemic story. This is a multidecade story. The 2.1% yield is pretty good, and it beats the market. Plus, the 10-year dividend growth rate of 10.8% is strong. However, there has been a marked deceleration in dividend growth. The most recent dividend increase was only 1.6%. The good news about the rather conservative dividend growth over the last few years is that it’s moderated the payout ratio down to 26.1% after spiking a bit a few years ago. So that sets them up for a nice dividend growth runway moving forward.

This stock is 20% off of its 52-week high, and that has brought the valuation down to a more reasonable level.

To be honest, this stock looked expensive at its 52-week high of $147.73. But now at a price of slightly under $118, the stock looks a lot better. Now, I wouldn’t say the stock is significantly undervalued or anything like that. But it’s reasonable, especially considering the recent tailwind the business has benefited from. They’re guiding for $9.00 in adjusted EPS for FY 2021. That puts the forward P/E ratio at just over 13. In this market, that’s very low. And the sales multiple is also indicating some cheapness. The P/S ratio of 0.9 is slightly below its own five-year average of 1.0, despite the company arguably being positioned better than ever. Polaris is a star worth looking at.

— Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

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