I’ve been a dividend growth investor for more than 10 years. What’s it done for me? How about completely transforming my life? That’s right.
By routinely investing my savings into high-quality dividend growth stocks, I was able to achieve financial independence and retire early – otherwise known as FIRE – at only 33 years old.
By the way, I explain exactly how I achieved financial freedom in just six years in my Early Retirement Blueprint. If you’re interested, you can download a free copy of my Early Retirement Blueprint here.
So when I say that dividend growth investing is a powerful investment strategy, I’m not kidding around. It’s really quite simple.
High-quality dividend growth stocks are some of the best stocks in the world because they represent equity in some of the best businesses in the world.
I’m talking about the businesses that keep our world running, selling the products and/or services the world demands. And that is a great position to be in.
A highly profitable position, which leads to safe, growing dividends. That said, not all dividend growth stocks are good buys at all times. Which is what brings me to our topic.
Today, I want to tell you my top five dividend growth stocks for February 2022. Ready? Let’s dig in.
Dividend Growth Stock Pick #1 for February 2022: Best Buy (BBY).
Best Buy is a North American consumer electronics and appliances retailer.
This $24 billion (by market cap) retailer has totally surprised me. I wouldn’t have expected them to do so well in such a tough environment for legacy brick-and-mortar retailers. But they’ve evolved with retail, adopted an omnichannel approach, and met the customer wherever they are. By doing so, they’re thriving. Restructuring and business sales have led to some messy financial results. However, if we look at EPS growth over the last five years, we’re talking about a CAGR of 15.8%.
Another thing that surprises me about Best Buy is their great dividend growth track record.
The company has increased its dividend for 18 consecutive years. And with a 10-year dividend growth rate of 15.8% to go along with the current yield of 2.9%, we’ve got a very compelling combination of yield and growth here. Even after all of those double-digit dividend increases, the payout ratio is only at 27.1%. So they have a lot of room to continue growing the dividend at a high rate for years to come.
The company is named Best Buy. And the stock could be a best buy.
I say that because this stock looks significantly undervalued right now. I recently analyzed and valued the retailer, estimating intrinsic value at slightly over $122/share. With the stock currently sitting at below $98, there could be 24% upside here once the market starts to more properly value the business. While you wait for that to happen, you’re getting a market-beating yield and double-digit dividend growth. I can be very patient when I’m collecting a fairly large dividend that’s growing at that kind of rate.
Dividend Growth Stock Pick #2 for February 2022: Comcast (CMCSA).
Comcast is a media and entertainment conglomerate.
Comcast, with its $227 billion market cap, kind of reminds me of Best Buy. What I mean by that is, it’s an old-school company that you might think would be struggling to survive in a rapidly changing and very competitive business landscape. However, just like Best Buy, Comcast isn’t just surviving but thriving. This company just keeps putting up impressive numbers. They have compounded revenue at 7.1% annually over the last decade, and they’ve compounded EPS at an annual rate of 13.2% over that time frame.
That kind of fantastic business growth tends to lead to fantastic dividend growth.
Indeed, Comcast has increased its dividend for 15 consecutive years, with their most recent dividend increase being announced only days ago. The 10-year dividend growth rate of 16.3% is amazing, although I wouldn’t expect that kind of growth to persist forever.
The dividend increase they announced a few days ago was 8%, which I think is a pretty good baseline in terms of what you should really expect moving forward. The payout ratio is only 35.5%, even after this increase, so the dividend is in a great position to continue growing at this level. And with a yield of 2.2%, it’s plenty of growth to make it worth your while.
The stock is 20% off of its 52-week high, and I think it’s been beaten down too much.
There seems to be a disconnect between the business and the stock. The company is printing great results, yet the stock has gone almost straight down since August. But that disconnect is just what you want if you’re looking to accumulate shares on the cheap. I recently performed a full analysis and valuation on Comcast, showing why shares could be worth $58/each. With the name still trading hands for less than $50/share, there’s a big gap to close. While you wait for that to play out, Comcast is rewarding you with a healthy dividend that just got raised only days ago.
Dividend Growth Stock Pick #3 for February 2022: Huntington Ingalls Industries (HII).
Huntington Ingalls is a major American defense company.
The company’s market cap is only $8 billion, so they’re a pretty small player in the defense space. But don’t let their small size fool you. Huntington Ingalls packs a punch. The company’s top-line and bottom-line growth over the last decade speaks for itself. Revenue grew at a compound annual rate of 4%, while EPS sports a CAGR of 24.8%. Yeah, 25% EPS growth. And the company has a backlog of over $50 billion – more than six times their market cap.
With those numbers, we shouldn’t be shocked to see excellent dividend metrics.
The five-year dividend growth rate is 20%, which lines up well with EPS growth. And the yield is 2.5%, which is plenty of current income when you’re looking forward to that kind of growth. Huntington Ingalls has increased its dividend for 10 consecutive years, which basically dates back to when they were initially spun off and became an independent entity, so there’s plenty of commitment to the dividend and the growth of it.
And since the dividend growth has been supported by similar EPS growth, the payout ratio has remained low – at only 28.3%. There’s a lot of headroom here for future dividend raises, especially when the business is growing at such a high rate.
This is a rare stock that’s actually up YTD, but I think there could be a lot more where that came from.
Even after holding its ground against a very tough stock market to start the year, the stock still looks quite undervalued right now. Our analysis and valuation video on Huntington Ingalls, which went live in early January, shows why shares could be worth almost $230/each.
The stock is sitting below $188 right now, so there’s meaningful upside potential here. I think the market will eventually realize the gap between price and value here. In the meantime, you’re looking at a 2.5% yield growing at a double-digit clip. There’s very little to dislike about Huntington Ingalls here, particularly with geopolitical events heating up.
Dividend Growth Stock Pick #4 for February 2022: Pinnacle West (PNW).
Pinnacle West is a utility holding company.
This utility has lost some shine after seeing a rate case go against them. Despite a deteriorating regulatory environment, though, their geographic environment is anything but deteriorating. This utility company is based in Arizona, which is going gangbusters right now. More people moving into Arizona means more customers for Pinnacle West, because you’re not going to live there without electricity. You’re definitely not living in the desert without air conditioning.
This explains why, for a stodgy utility, they’ve put up some good numbers. The top line has compounded at an annual rate of 1.1% over the last decade. Pretty standard for a utility. However, EPS has a CAGR of 5.2% over that time frame. And that’s actually solid for this kind of business model.
Another thing that’s solid here is the dividend.
This $8 billion (by market cap) utility has increased its dividend for 10 consecutive years. And that includes their most recent dividend increase, announced in November, which came after the unfavorable rate case ruling. So you know that this company is dedicated to the dividend, even when things aren’t perfect for them.
The 10-year dividend growth rate is 4.7%, and that lines right up against EPS growth. Plus, the stock yields a very attractive 4.8%. With a payout ratio of 67.5%, the dividend is easily covered and likely to continue growing at a mid-single-digit rate.
This is another name that’s actually up on the year, which goes to show how well dividend growth stocks hold up during market turmoil. But it still looks undervalued.
I’m not saying it’s substantially undervalued here. It’s not the cheapest stock in the market. But the valuation is undemanding. I recently analyzed and valued Pinnacle West in a video, and my estimate of intrinsic value came out to right about $76/share.
The stock has done really well over the last month, with so much volatility present across the broader market. But with the price at under $71, there’s still some decent upside potential here. And you’re getting a near-5% yield.
Dividend Growth Stock Pick #5 for February 2022: T. Rowe Price (TROW).
T. Rowe Price is a large investment management company.
The company’s market cap is $34 billion, with $1.7 trillion in assets under management. This is a major player in the investment management space. And that bodes well, as this is an area where scale definitely matters. The greater the AUM, the greater the fees.
And that means more revenue and more profit, which is exactly what has transpired here. T. Rowe Price has compounded its revenue at an annual rate of 9.5% and its EPS at an annual rate of 14.6% over the last decade, which is highly impressive.
The company’s dividend story is also highly impressive.
T. Rowe Price has increased its dividend for 35 consecutive years. Yep. This is a Dividend Aristocrat. The 10-year dividend growth rate is 12.8%, which is strong. And the yield, at 2.9%, is very appealing and more than twice as high as what the market offers.
It should also be considered that T. Rowe Price is expected to increase its dividend in the coming days, so the annualized yield on a go-forward basis is likely to be over 3%. With the payout ratio at just 32.9%, T. Rowe Price can afford to be generous with that upcoming dividend increase.
This is one of my very best ideas for long-term dividend growth investors.
What’s not to like here? This is a debt-free Dividend Aristocrat offering a near-3% yield. The business has nearly flawless fundamentals across the board. That’s something I talked about in our most recent analysis and valuation video on T. Rowe Price, which went live at the end of December.
In that video, I showed why I think shares are worth over $221/each. The stock has recently fallen off a cliff, and its now at around the $150 area. In my opinion, the upside potential here is tremendous. Take a good look at this name, if you haven’t already.
— 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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