The stock market is a funny place.
It’s the only market in which people are seemingly afraid of getting a good deal. If the supermarket runs a sale on food, there’s a line out the door to get in. If the stock market runs a sale on stocks, everyone is rushing for the exits.
Of course, an intelligent long-term investor sees the folly in this and takes advantage.
How? By being greedy when others are fearful. An intelligent long-term investor also knows something else.
Price and yield are inversely correlated. All else equal, lower prices result in higher yields. If you dream of living off of safe, growing dividend income, lower prices can make that dream come true even faster.
Today, I want to tell you about 5 dividend growth stocks that are down 20% or more from their recent highs.
Ready? Let’s dig in.
The first dividend growth stock I want to bring to your attention is American Tower (AMT).
American Tower is an infrastructure real estate investment trust with a market cap of $96 billion.
Real estate isn’t limited to shopping malls and housing. No. Real estate comprises all kinds of physical structures. American Tower proves how differentiated real estate can be, as the REIT owns and operates communications towers. These towers are where a variety of equipment is installed – equipment that’s necessary to carry out services such as telephony, mobile data, radio, and broadcast television.
With mobile data more important than ever, and with self-driving cars still in their infancy, the towers, and the equipment on them, are only becoming increasingly necessary to everyday life. That’s what sets up American Tower for a long, long runway for continued profit and dividend growth.
The tower REIT has increased its dividend for 13 consecutive years.
And what a blistering start American Tower is off to, as evidenced by the 10-year DGR of 20.3%. Now, that is very high for a REIT. REITs typically offer high yields and low growth rates, but American Tower flips the script here. Of course, that does mean that you have to sacrifice some yield. But I don’t think the sacrifice is really all that great. After all, the stock yields 3% here.
That’s a very respectable yield, especially when it’s paired with such a high dividend growth rate. And the payout ratio is just 64.9%, based on midpoint guidance for FY 2023 AFFO/share. That gives me a lot of confidence in the sustainability of the dividend, as well as the growth potential of it.
This stock’s 27% decent from its 52-week high has created what looks like a very appealing valuation.
The stock’s 52-week high is $282.47. Its current pricing is right about $207. So we’re talking about a near $100/share drop here. If you bought at the high, that’s unfortunate. But for those who are looking to get in now, I think the long-term setup is pretty favorable.
We recently covered American Tower in a full analysis and valuation video, estimating fair value for the REIT at $224.19/share. In my view, the stock was simply too expensive at almost $300. But down here around the $200 level? It’s much more buyable. Take a look at it.
The second dividend growth stock I have to highlight is Alexandria Real Estate Equities (ARE).
Alexandria Real Estate is a laboratory real estate investment trust with a market cap of $21 billion.
Another REIT. Not a surprise, right? Rising interest rates have crushed REITs, as a REIT is hurt by higher rates twice over – it makes debt more expensive, and it makes the shares look less attractive on a relative basis (because there are competing yields elsewhere). But you have to ask yourself a question: Are you in this for the short term, or are you in it for the long term?
If it’s the latter, Alexandria Real Estate is running a fantastic operation, focusing on high-value, hard-to-replace labs where the specialized work cannot be easily done by someone working in their extra bedroom at home in their pajamas. Some of the world’s largest pharmaceutical companies are top tenants. And the REIT continues to crush it in all aspects, including the dividend growth.
The lab REIT has increased its dividend for 13 consecutive years.
Like American Tower, Alexandria Real Estate is more of a “growthy” REIT. The yield is 4.1%. So it’s no slouch there. But the 10-year DGR of 8.7% is where a lot of the magic is, as that greatly exceeds the low-single-digit dividend growth you get from a lot of other REITs out there.
Another magical factor here is the low, low payout ratio of 54.1%, based on midpoint AFFO/share guidance for this fiscal year. That’s one of the lowest payout ratios I know of in all of REITdom, which makes this one of the safest dividends in the entire space.
This stock has dropped massively. It’s down 42% from its 52-week high.
In addition to rising rates, it seems that Alexandria Real Estate has been caught up in the selloff affecting office REITs, even though this is not a traditional office REIT. We’re talking about labs where high-level R&D is done, not data entry or customer service. This isn’t casual “work-from-home” stuff.
The REIT’s North American occupancy is near 95%. And that’s why this stock’s fall from $203.39 at the 52-week high to the current pricing of approximately $118 has been really quite surprising. Nonetheless, that could be just the opportunity a long-term dividend growth investor is looking for to pick up a very high-quality REIT on the cheap.
Based on that aforementioned guidance, the forward price-to-adjusted-funds-from-operations ratio is 13.3. Its five-year average P/CF ratio is 25.1. We are in deep value territory here. Want a great deal? Here you go.
The third dividend growth stock I have to cover is Comcast Corporation (CMCSA).
Comcast is a media and entertainment conglomerate with a market cap of $160 billion.
Comcast has been such an interesting case study in a narrative versus reality. The narrative, which is commonly accepted and proliferated, is that it’s a dying cable company. The reality is that it’s a growing conglomerate with interests in everything from theme parks to broadband connectivity.
And it’s that latter part of the business that is actually ironic, as you can’t stream the kind of content that’s supposedly killing cable TV without access to the Internet. And how do you get a high-speed connection at home? Well, that leads you right to broadband. This is why Comcast continues to confound the doubters and grow, which has supported the rising dividend.
The conglomerate has increased its dividend for 16 consecutive years.
Does a 10-year DGR of 13.3% sound like death to you? If that’s a “dying” company, I’d like to see a company that isn’t dying. Along with that double-digit dividend growth rate, the stock yields a handsome 3.1%. That yield beats the market. It’s also 100 basis points higher than its own five-year average. And a healthy payout ratio of 31.8%, based on TTM adjusted EPS, indicates a safe dividend, despite the narrative.
It’s mounted a recent comeback, but the stock is still down 21% from its 52-week high.
This stock is up about 7% on the year. And it’s actually come roaring back from recent lows. However, the current price of $38 is still well off of its 52-week high of $48.22. And this is a case where I actually don’t think the 52-week high was all that egregious in the first place, unlike some other stocks where they just got too expensive and were due for a big correction.
Our most recent analysis on Comcast showed why the business could be worth about $56/share. Comcast has had a decent run of late, but I still think there’s a lot of gas in the tank. The valuation remains quite compelling for long-term dividend growth investors.
The fourth dividend growth stock we have to have a conversation about is Medtronic plc (MDT).
Medtronic is a global medical devices company with a market cap of $109 billion.
Yes, we’ve all been hearing about the potential for an upcoming recession. But here’s the thing: Healthcare is in secular growth mode. Healthcare demand does not correlate with economic cycles. If one is in need of healthcare, it doesn’t matter whether or not the economy is in a recession – the health issue is all that matters to that person at that point in time.
Well, this plays right into the hands of Medtronic, which is in the business of providing devices ranging from heart valves to insulin pumps. That’s a big part of why Medtronic has been racking up dividend raises for decades.
The medical devices company has increased its dividend for 45 consecutive years.
This is a vaunted Dividend Aristocrat. The 10-year DGR of 10% pairs very well with the stock’s current yield of 3.3%. Keep in mind, this isn’t the kind of stock that usually offers a yield this high. This is 100 basis points higher than its own five-year average.
Then again, there has been some deceleration in recent dividend growth, and rates have risen. So a higher yield, to some degree, makes sense to me. A payout ratio of 51.4%, based on midpoint guidance for this fiscal year’s adjusted EPS, indicates that Medtronic will continue to do what it’s been doing with the dividend for decades already.
This Dividend Aristocrat is down a shocking 28% from its 52-week high.
When a high-quality Dividend Aristocrat suffers a drawdown like this, you start to ask questions. Was it extremely overvalued? Is there a structural shift in the business? Is there a some kind of short-term shock occurring? In my view, it’s more of that last scenario than anything else. At the 52-week high of $114.31, the stock did get slightly ahead of itself.
But the bigger story is that Medtronic benefits from certain elective procedures that aren’t emergencies, and many of these procedures were postponed as a result of the pandemic. Recent quarters have shown a rebound, however. And with the stock now priced at about $82, it looks severely undervalued relative to our estimate of intrinsic value of $111/share that we worked out in our last analysis of the business. Don’t underestimate Medtronic.
The fifth dividend growth stock I must bring up is T. Rowe Price Group (TROW).
Rowe Price is an investment management company with a market cap of $26 billion.
The investment management business model is fantastic. High margins. Sticky assets. And you’re benefiting from the compounding nature of global capital markets – at scale! It’s almost a can’t-lose game over the long run, assuming you don’t totally screw it up.
Well, T. Rowe Price has definitely not screwed anything up. To the contrary, this company has been prolific at growing the business like clockwork for decades. And that clockwork-like growth has included the dividend, too.
The investment management company has increased its dividend for 37 consecutive years.
Yet another Dividend Aristocrat. To see two Dividend Aristocrats down so heavily is strange, but we’re in strange times right now. The 10-year DGR of 13.4% is very impressive, although there has been a slowdown in this department.
Not totally surprising, as 2022 saw one of the worst years ever for the S&P 500. That naturally caused a dip in AUM for T. Rowe Price. Nonetheless, the payout ratio of 60.9%, based on TTM adjusted EPS, hasn’t been too negatively affected by all of this. And the stock yields 4.3%, which is nearly unheard of for this stock.
Unless you think this business is permanently impaired, the stock’s 22% decline from its 52-week high could be a huge buying opportunity.
Based on that TTM adjusted EPS, the stock’s P/E ratio is only 14.2. That’s quite reasonable for a high-quality Dividend Aristocrat with no long-term debt on the balance sheet. At the 52-week high of $146.04, the stock actually looked pretty good. Now, at about $114, the stock looks amazing. We last analyzed and valued the business about nine months ago, estimating fair value at $155.40/share. A stock being cheap doesn’t preclude it from getting cheaper. But I think the long-term setup here is quite compelling. Take a good look at T. Rowe Price.
— Jason Fieber
