Who doesn’t love a good sale? That’s exactly what you’ve got going on in the stock market right now. Many stocks are down 20%, 30%, 40% or more from recent highs.

Now, not every one of them is a good deal. If a stock was overvalued by 50% and subsequently fell by 20%, it’s still a ways to go before you’ve got a deal on your hands.

However, many stocks were not all that expensive at the beginning of the year. And significant falls from those not-so-lofty heights have left them looking very cheap now.

This is true even for many high-quality dividend growth stocks. These are some of the best stocks in the market.

I’m not talking about the no-profit “innovation” stocks that were going for insane valuations.

I’m talking about stocks representing equity in world-class businesses that pay reliable, rising dividends to their shareholders. They’re able to pay those reliable, rising dividends because they produce reliable, rising profits.

And they produce reliable, rising profits because they actually sell stuff. Increasing amounts of that stuff, by the way. High-quality dividend growth stocks often hold up well during volatility, but they’re not totally immune.

And this short-term volatility could be your long-term opportunity. Today, I want to tell you about five dividend growth stocks that are down more than 20% from their recent highs. Ready? Let’s dig in.

The first stock I want to bring to your attention today is AbbVie (ABBV).

AbbVie is an international biopharmaceutical company with a market cap of $244 billion.

This is a great business in a great space. I love the healthcare space. It’s secular growth. Can you imagine any future in which there are less human beings walking around this planet demanding less healthcare? Of course not. The global population continues to rise. People continue to get wealthier, on average. And the human lifespan continues to expand.

Those three ingredients bake a certain cake. And that cake is rising demand for quality healthcare. It’s inevitable. As one of the world’s largest pharmaceutical companies, providing people with medicine to treat a variety of diseases, AbbVie stands to benefit from this. And that goes for their dividend, too, which should continue to grow like clockwork.

The biopharmaceutical company has increased its dividend for 10 consecutive years.

That relatively short track record belies their true potency as a reliable dividend payer and grower. That’s because this business was spun off from former parent company Abbott Laboratories – stock ticker ABT – a decade ago. The legacy company had, and has, decades of dividend growth under its belt. And that’s why AbbVie is actually a Dividend Aristocrat, even though they don’t have 25 consecutive years of dividend increases under their belt as an independent entity.

The five-year dividend growth rate of 17.9% tells you a bit more about the potency here. Plus, the stock yields 4.1%. Hard to find that kind of yield paired with that kind of dividend growth. And with a payout ratio of 40.2%, based on midpoint guidance for this year’s adjusted EPS, the dividend is secure.

This Dividend Aristocrat is down 21% from its recent high. Could be a nice buying opportunity here.

Now, let me be clear. When the stock ran up to its 52-week high of $175.91, I thought it was getting ahead of itself. But now down here, with shares going for about $138/each? I think it’s reasonably valued once again. I last highlighted this stock in a full analysis and valuation video last fall, and the estimate for fair value on the business came out to about $123/share. The stock went on a huge run not long after that video came out, so I’ve hesitated from featuring AbbVie.

But since that video came out, AbbVie increased its dividend by 8.5% – almost exactly in line with my expectations in the DDM analysis I used to value the business. That dividend increase makes the equity that much more appealing and valuable. A combination of the dividend increase and the the 21% drop in the stock price has led to what I think is a reasonable enough valuation to make this dividend growth stock buyable once again after a period of relative unattractiveness due to an excessive valuation. Take a good look at AbbVie here.

Next up, I want to have a quick discussion about Discover Financial Services (DFS).

Discover is a financial services company with a market cap of $27 billion.

This is one of the “Big Four” credit card network companies. They own and operate the Discover network, along with Discover Bank. These payment “rails” are incredibly profitable, especially in a world that is becoming increasingly digital around all things money. How profitable? Well, this company has more than quadrupled its EPS over the last decade. Net margin is typically coming in at 25% per year. This company makes a lot of money. And they continue to grow that large pile of money. That has led to them being able to pay out a nice dividend that continues to grow at a high rate.

Discover has increased its dividend for 12 consecutive years.

What I like about the dividend here is that you don’t really have to sacrifice in any one area. You get yield. The stock’s yield is 2.5%. You also get growth. The 10-year DGR is 25.1%. The most recent dividend increase came in at 20%. Plenty of double-digit long-term dividend growth here. And you also get safety. The payout ratio is only 14.1%.

But it seems like none of that matters. This stock is down 30% from its 52-week high.

The 52-week high is $135.69. Shares are now going for about $94/each. Big drop. So what gives? Well, Discover could be vulnerable to a possible recession in two ways. First, lower spending reduces usage of their network. That means less fees. And any uptick in delinquencies would affect the lending side of the business. Now, any business has risk. And a recession is possible, which would impact Discover. But we have to remember that the stock’s 30% slide has already priced in at least some of that recessionary risk. The P/E ratio is now an obscenely low 5.6.

While we should acknowledge that earnings will be coming down in the near term, the stock’s valuation compression has prepared itself in advance for much of that. And if inflation continues to run hot, Discover does benefit from that through higher nominal spending along its network. Credit card networks have inflationary tailwinds built right in, since higher spending in absolute dollars gives their fees a lift. I think Discover is worth discovering here. Don’t forget about it.

The third stock we should talk about is Fastenal Company (FAST).

Fastenal is an American industrial products distributor with a market cap of $28 billion.

This is one of those businesses that runs under the radar, yet it continues to be run well and do things the right way. Headquartered in little-known Winona, Minnesota, they grind it out by selling more and more industrial products like fasteners and safety products. I love companies like this. No claims. No games. Just sell more stuff and make more money without the need for fanfare. They’ve quietly doubled sales and EPS over the last decade. They’ve also quietly built up a fantastic track record of paying out a safe, growing dividend.

The industrial products distributor has increased its dividend for 23 consecutive years.

They’ve consistently handed out double-digit dividend increases for years and years. The 10-year DGR is 15.6%. And the stock offers a 2.6% yield to go along with that. The one thing here is that the payout ratio, which is sitting at 72.9%, is a bit elevated. However, Fastenal runs a tight ship. They’ll moderate the dividend raises, if necessary. And they have a terrific balance sheet, giving them further flexibility in this department. I have zero concerns with the dividend’s sustainability.

Another thing that’s under the radar here? The stock’s 25% fall from its recent high.

Not too many people bring up Fastenal or the fact that the current pricing of its shares, at around $48/each, is 25% below the 52-week high pricing of $64.75/each. But that’s why I’m bringing it up. I think this business is worth talking about and looking at, if not investing in. It’s a fundamentally sound business. And the valuation has become interesting once again. I wouldn’t have considered buying this stock at almost $65. But below $50? It’s at least on the radar.

Most basic valuation metrics have dropped to levels that put them in line with their respective recent historical averages. For instance, that 2.6% yield is 30 basis points higher than its five-year average. The P/E ratio of 28.5 matches up precisely with the stock’s own five-year average. This is a stock that, to me, looked expensive at the 52-week high. But it doesn’t look expensive anymore.

Next up, I want to highlight L3Harris Technologies (LHX).

L3Harris is a large defense contractor with a market cap of $43 billion.

What’s compelling about L3Harris, compared to most defense contractors, is that they’re in the areas of warfare technology that will almost certainly be highly useful in the combat of the 21st century and beyond. This is about tomorrow’s warfare. I’m talking about C6ISR systems and products. Command and control. This has helped them to grow like a weed.

Revenue and EPS have both tripled compared to a decade ago, although the current company is the result of a 2019 merger between former smaller companies Harris Corporation and L3 Technologies, so bear that in mind. With the current geopolitical environment being what it is, L3Harris is positioned well. And that positions the dividend well, too.

This defense company has increased its dividend for 21 consecutive years.

I think they’re just getting started with that. The 10-year DGR is 14.4%. And the yield, at 2%, is decent and beats the market. This yield is also 10 basis points higher than its own five-year average, so you’re looking at a better-than-average yield in a better-than-average geopolitical environment. Hard to complain about that. Based on midpoint guidance for this fiscal year’s adjusted EPS, the payout ratio is only 33.2%. This is a well-positioned and well-covered dividend.

The stock is down 21% from its 52-week high, despite open war in Europe.

Now, the market can be an emotional place. And the war between Russia and Ukraine sent a lot of defense stocks skyrocketing past what was reasonable. That’s also true for this stock, which ran all the way up to a 52-week high of $279.71. Shares have since fallen to around $221.50/each. Do I think the stock was buyable at almost $280? Nope. Do I view it as buyable at around $220? Yep. Most basic valuation metrics are now below their respective recent historical averages.

For example, the P/E ratio of 23.9 is quite a bit below its own five-year average of 27.3. There’s also a disconnect in the cash flow multiple. The current P/CF ratio of 21.4 is lower than its own five-year average of 22.7. Above-average yield. Below-average valuation. And above-average operational environment for a defense company. I don’t think this stock is a steal, but it should at least be on your radar (no pun intended).

Last but not least, let’s have a quick conversation about Store Capital (STOR).

Store Capital is an American net lease real estate investment trust with a market cap of $7 billion.

I’m a huge fan of REITs. See, owning income-producing real estate is great in concept. But in reality? Not so much, unless you like scouting properties, securing financing, dealing with tenants, taking on a lot of single-property risk, and handling the various headaches of maintaining a structure that slowly deteriorates. But REITs like Store Capital allow you to instantly invest in an established, scaled portfolio of real estate.

In this case, we’re talking about nearly 3,000 commercial properties spread out across the US, with an occupancy rate of 99.5%. The REIT takes care of everything for you. They collect the rent. And then they pass along that rent to you, in the form of a dividend. As the portfolio gets bigger and rents rise, so does the dividend.

The REIT has increased its dividend for seven consecutive years.

The five-year DGR is 5.9%. And that’s pretty much the rate at which this business is growing its bottom line on a per-share basis. Not huge. But here’s the thing. This REIT gives you a mouth-watering yield of 6%. If you want a higher growth rate, you can get that elsewhere. Instead, you get plenty of income here. Indeed, it should be noted that this 6% yield is 170 basis points higher than its own five-year average.

That’s remarkable. And with Store Capital’s most recent guidance for FY 2022 adjusted funds from operations per share – guidance which actually got boosted in their Q1 report – the payout ratio is 69.5%. That’s very acceptable for a REIT.

This REIT has been hammered this year, now down 31% from its recent high.

The thing about this stock is that, unlike some other stocks on today’s list, like, say, AbbVie, Store Capital’s stock didn’t even look all that expensive at its 52-week high. The 52-week high of $37.13 was, in my view, reasonable. But as John Maynard Keynes once remarked, “The market can remain irrational longer than you can stay solvent.” With shares currently trading hands for about $25.50/each, irrationality in the valuation has, in my view, entered the picture. The P/CF ratio of 11.2 is substantially lower than its own five-year average of 16.2.

The stock is priced as if the business is struggling. But it’s not. They just boosted full-year guidance after growing adjusted funds from operations per share by 21.3% YOY for Q1 FY 2022. The business is not down 31%, even if the stock is. And that disconnect could be a massive buying opportunity. Store Capital is the only REIT Warren Buffett has in the $290 billion common stock portfolio he oversees for his conglomerate Berkshire Hathaway Inc. Now might be a good time to consider being invested in Store Capital alongside the Oracle of Omaha.

— 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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