High-quality dividend growth stocks are some of the best stocks in the world. Why?

Because they represent equity in some of the best businesses in the world. How do you pay ever-growing dividends?

By producing the ever-growing profits necessary to sustain that behavior. And how do you produce ever-growing profits? By running a world-class business. It’s a virtuous circle.

And consistently increasing dividends are tangible proof of just how virtuous it is.

I’ve been personally dividend growth investing for more than a decade now. This strategy was critical to my ability to go from below broke at age 27 to financially free at 33.

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.

Dividend growth investing can be profoundly transformative. That said, not all dividend growth stocks are great buys at all times. Focusing on the best long-term opportunities right now is what this article is all about.

Today, I want to tell you my top five dividend growth stocks for April 2022. Ready? Let’s dig in.

My first dividend growth stock pick for April 2022 is Cummins (CMI).

When you think of Cummins, you might think only about diesel engines. Well, Cummins is so much more than that. The everyday goods we consume are often produced and moved around using the power generation products that Cummins manufactures and distributes. Because of this, Cummins is part of the industrial backbone of the American economy. And that’s a great backbone to be part of, which is why it’s not surprising to see very good business growth here. Revenue has a CAGR of 3.7% over the last decade, while EPS has compounded at an annual rate of 6% over that time frame.

Cummins has increased its dividend for 16 consecutive years. The 10-year dividend growth rate is 15.5%, which is actually pretty incredible. That easily exceeds inflation. Now, dividend growth has exceeded EPS growth, which has caused a slight expansion in the payout ratio. However, that payout ratio is still only at 39.7%. So there’s easy coverage of the dividend. Meantime, the stock yields a market-beating 2.8%.

The stock is more than 20% off of its 52-week high, and I think the valuation is rather compelling.

Almost every basic valuation metric is lower than its respective recent historical average. Take the P/E ratio, for example. It’s at 14.4 right now. That’s low in both absolute and relative terms. Keep in mind, the five-year average P/E ratio for the stock is at 17.0. There’s a big delta between those two numbers. We’re actually working on a full analysis and valuation video for Cummins, and that should be out very soon.

In it, you’ll see that Cummins is a great business that looks notably undervalued. One last thing here about Cummins is that they’re not resting on their laurels. They’re heavily investing in the future of mobility, with growing exposure to areas like fully electric and hybrid powertrain systems, as well as hydrogen fuel cell technology. If Cummins wasn’t already on your radar, now it is.

My second dividend growth stock pick for April 2022 is Home Depot (HD).

Home Depot is the world’s largest home improvement retailer.

Home Depot was a pandemic darling. As we move past the pandemic, and as people start to spend more time outside of their homes – homes which have been bought and renovated – Home Depot might be losing a bit of its luster. But if you’re in it for the long term, which any true investor should be, this is one of the best retailers you can possibly own a slice of. Revenue sports a CAGR of 8.1% and EPS sports a CAGR of 20.0% over the last decade. Gaudy numbers.

Like I’ve said before, Home Depot should be thought of as Dividend Depot.

They’ve only increased the dividend for 13 consecutive years. But what a start they’re off to. The 10-year DGR is 20.3%, which lines right up with EPS growth. Amazing. And the stock even yields a rather healthy 2.5%. That’s a great combination of yield and growth. With a payout ratio of only 48.9%, the dividend is positioned to continue growing like clockwork.

Growth for Home Depot might slow in the near term, but that’s largely been priced in.

Keep in mind, this was a $420 stock as recently as December. It’s now pretty close to a $300 stock. So that’s a lot of growth expectations – and market value – being shaved off in a very short period of time. Now, maybe it shouldn’t have been over $400 in the first place. But I think the market might have now overshot to the downside.

We recently put out a full analysis and valuation video on Home Depot, showing why the business could be worth almost $350/share. With shares trading hands for about $310/each, I think the pendulum has swung too far to the other side, presenting a compelling long-term investment opportunity for dividend growth investors.

My third dividend growth stock pick for April 2022 is Kinder Morgan  (KMI).

Kinder Morgan is a North American energy infrastructure company.

The global energy environment has been rapidly changing over the last two years. And what we’ve learned recently is, energy infrastructure is critical to our modern-day society. I think rational people have always known this. But I suppose an energy crisis or two over in Europe is a good reminder for everyone else. As one of the largest energy infrastructure companies in North America, Kinder Morgan is poised to benefit from this renewed.. shall we say… appreciation.

Kinder Morgan’s revenue has a CAGR of 6% over the last decade. EPS, on the other hand, isn’t meaningful because of the corporate structure. Instead, you want to look at cash flow. Either distributable cash flow, which is a common metric in the energy infrastructure space, or your standard free cash flow. Take your pick. Free cash flow has a CAGR of 21.4% over the last decade, which is huge.

You know what else is huge? This company’s dividend.

That’s right. The stock yields 5.7%. That’s a very attractive yield in this low-rate world. And while Kinder Morgan’s dividend growth track record is still short, they’re on pace to hit their fifth consecutive year of dividend increases this year. So there’s promise here. The current dividend is more than double what it was in 2017.

And the company is guiding for a 3% dividend raise this year. When you’re getting a near-6% yield, that’s enough growth to make it worth your while, in my view. With the company forecasting $4.7 billion in distributable cash flow this year, and with the dividend costing about $2.5 billion this year, this is a well-covered payout.

The stock is up 17% YTD, but there could be a lot more where that came from.

Let’s remember, this was a $22 stock before the pandemic hit. It’s now a $19 stock. What’s the difference between the Kinder Morgan of early 2020 and the Kinder Morgan of early 2022? Well, the Kinder Morgan of early 2022 is one with a better balance sheet, more cash flow production, a bigger dividend, and a more favorable operating environment.

With the US having recently signed a deal to supply Europe with more natural gas, Kinder Morgan and its ilk should benefit. I actually added to my own position in Kinder Morgan in late February at about $16.60/share, which I alerted my Patrons about in real-time, but I wouldn’t mind adding to it again at $19/share. The P/CF ratio, at 7.6, is very low and still off of its own five-year average of 8.0 – even after a run. Take a look at Kinder Morgan, if you haven’t already.

My fourth dividend growth stock pick for April 2022 is Merck (MRK).

Merck is a leading global pharmaceutical company.

With one of the world’s best-selling drugs in blockbuster Keytruda, Merck is poised to continue riding the secular growth wave in healthcare, with the world’s expanding demographics almost certainly leading to increasing demand for quality healthcare.

Revenue is flat over the last decade, partly due to a spin-off, and partly due to Keytruda not coming on the scene until 2015. However, earnings per share sports a CAGR of 10.4% over the last 10 years. And with Keytruda still firmly under the patent protection umbrella, and with Merck firing on all cylinders across the board, I think the company is positioned better than ever.

That positions the dividend better than ever.

Merck offers one of the most compelling dividend stories in all of healthcare. The stock’s yield of 3.4% blows away the broader market’s yield, and this kind of yield is not commonplace across healthcare. They’ve increased the dividend for 11 consecutive years, with a 10-year DGR of 5.5%. That’s good.

But it gets better, because there has been a recent acceleration in dividend growth. The five-year dividend growth rate comes in at 7.2%, while the three-year dividend growth rate is at 10.6%. With a payout ratio of 47.3%, based on midpoint guidance for FY 2022 EPS, this dividend growth train is only starting to take off.

This stock could be one of the best deals in the market right now.

I’ve already completed work on a full analysis and valuation video on Merck. That should be coming out soon, so keep an eye out for it. In the video, my estimate of intrinsic value for the business comes out to slightly under $98/share.

With the stock currently priced at less than $82, it looks significantly undervalued here. There’s very little to dislike about Merck, yet so much to love. In my view, the risk/reward setup on Merck greatly favors long-term dividend growth investors. Don’t leave this name off of your shopping list.

My fifth dividend growth stock pick for April 2022 is Morgan Stanley (MS).

Morgan Stanley is a multinational investment bank and financial services company.

Morgan Stanley is pretty much everywhere you want to be in finance right now. They’re in wealth management, capital raising, financial advisory, corporate lending, etc. Under the adept leadership of CEO James Gorman, Morgan Stanley has transformed into one of the largest diversified capital markets banking institutions in the world.

The investment bank has grown its revenue at a compound annual rate of 9.7% and its EPS at a compound annual rate of 21.8% over the last decade, which is very, very impressive.

Also impressive is the dividend.

The company has increased the dividend for eight consecutive years, with a five-year DGR of 24.6%. Not impressed yet? Check this out. Morgan Stanley’s most recent dividend increase came in at a whopping 100%.

This doubling of the dividend cranked the stock’s current yield up to 3%, which is 80 basis points higher than its own five-year average. And even after that massive dividend increase, the payout ratio is at only 34.9%. That gives the company a lot of room in terms of future dividend raises, which is music to my ears.

The stock is well off of its recent highs, and I think it’s cheap here.

We recently put out a full analysis and valuation video on Morgan Stanley, where I estimated fair value for the company’s shares at just over $101/each. Now, the stock did go on a bit of a run in the time between me finalizing my work on that video and us being able to fully edit and publish it. That’s the stock market.

Stocks go up and down every day. But even after a bit of a bounce, the stock’s pricing of about $92 is still below both my fair value estimate and its own recent high of nearly $110. Morgan Stanley has been knocking it out of the park. It’d be wise for long-term dividend growth investors to consider owning a slice of this company and letting James Gorman go to work for them.

— 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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