Life is hard.
But it’s harder if you’re poor.
We live more in a global economy than a global society.
Economics binds us more than anything else.
Almost everything worthwhile costs money – oftentimes quite a bit of money.
This is why it’s crucial to start saving and investing as soon as possible.
Having enough wealth and passive income to make life smoother and easier is a great start.
But having enough to actually be financially free and able to live life on your terms is like having a cheat code to life.
Toward that end, I know of no better strategy to accomplish that than dividend growth investing.
You can find hundreds of examples of such businesses by pulling up the Dividend Champions, Contenders, and Challengers list, which has compiled data on US-listed stocks that have raised dividends each year for at least the last five consecutive years.
Consistently acquiring shares in great businesses paying growing dividends adds up over time.
And once you have enough passive dividend income to cover your bills, that allows you to operate in a tough reality with so much more ease.
This is a situation I was determined to put myself in, and I was able to get there.
The FIRE Fund, which is my real-money portfolio, generates enough five-figure passive dividend income for me to completely live off of.
If you’re curious to learn how that’s possible, be sure to read my Early Retirement Blueprint.
The consistent acquisition of shares in great businesses can unlock much of what I’ve been discussing here, but those acquisitions should come when valuations are favorable.
And that’s because price is only what you pay, but value is what you actually get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
Consistently acquiring high-quality dividend growth stocks when they’re undervalued can allow one to build enough passive income to unlock financial freedom and make real life so much easier.
But knowing when valuations are favorable in the first place first requires one to understand the ins and outs of valuation.
Well, that’s where Lesson 11: Valuation comes in.
Written by fellow contributor Dave Van Knapp, it’s a fantastic guide that lays out the concept of valuation using simple-to-understand terminology.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
Allegion PLC (ALLE) is an American (but Irish-domiciled) provider of security products for homes and businesses globally.
Founded in 1908, but spun out into an independent company from Ingersoll Rand Inc. (IR) in 2014, Allegion is now a $12 billion (by market cap) security competitor that employs over 13,000 people.
The company reports results across two geographic segments: Allegion Americas, 79% of FY 2025 revenue; and Allegion International, 21%.
Revenue is roughly split 50/50 between new construction and aftermarket.
The company produces and sells a number of security-related products and accessories, including: access control systems, door closers, exit devices, electronic security products, locks, and key systems.
These products are sold under a range of leading brands, including: CISA, Interflex, LCN, Schlage, SimonsVoss, and Von Duprin.
Allegion is a fantastic business because it’s more than the sum of its parts.
It doesn’t simply sell products; it sells security itself.
And security is critically important to one’s wellbeing.
Based on Maslow’s Hierarchy of Needs, safety is eclipsed only by basic survival needs (such as food and water).
I’d argue that crime and danger are perceived (rightly or wrongly) to be more prevalent now than in the past – a perception not helped by widespread social issues such as homelessness and drug addiction.
This perception creates elevated structural demand for products and services designed to improve safety.
Furthermore, that structural demand is supercharged by technology, as high-tech security solutions (such as electronic locking systems) are more advanced, effective, and (you guessed it) expensive than analog alternatives.
That’s great news for Allegion, which supplies the global market with high-tech safety solutions designed to make lives, buildings, and valuables more secure.
Due to the harsh reality we live in which is afflicted by human nature, it’s hard to imagine any future in which safety becomes less paramount or demand for security products and services goes down, which is why Allegion is set up so well to continue increasing its revenue, profit, and dividend for many years to come.
Dividend Growth, Growth Rate, Payout Ratio and Yield
Indeed, Allegion has increased its dividend for 13 consecutive years.
The 10-year dividend growth rate is 17.7%, which is very strong, but more recent dividend raises have been in a high-single-digit range (around 8% or so) – still strong, but not quite as forceful.
And with the payout ratio sitting at just 30%, Allegion’s dividend appears to be ultra safe and poised for much more growth.
Pairing this yield with a HSD-LDD dividend growth profile gets one to a 10%+ annualized total return pretty quickly – all on a business that’s easy to understand with secular growth drivers.
That strikes me as pretty appealing.
Revenue and Earnings Growth
As much as it may be, though, a lot of the appeal is built on data from the past.
However, investors must always be thinking about the data that’s likely to come in the future, as the capital of today is risked for the rewards of tomorrow.
Thus, I’ll now build out a forward-looking growth trajectory for the business, which will come in handy during the valuation process.
I’ll first show you what the business has done over the last ten years in terms of its top-line and bottom-line growth.
And I’ll then reveal a professional prognostication for near-term profit growth.
Amalgamating the proven past with a future forecast in this way should allow us to develop an idea of where the business could be going from here.
Allegion advanced its revenue from $2.2 billion in FY 2016 to $4.1 billion in FY 2025.
That’s a compound annual growth rate of 7.2%.
Great top-line growth out of a large, mature company.
Meantime, earnings per share grew from $2.36 to $7.44 over this period, which is a CAGR of 13.6%.
Excellent.
A combination of steady buybacks and expanding margins (from higher-margin tech-driven security solutions) helped to drive excess bottom-line growth.
Regarding the buybacks, Allegion reduced its outstanding share count by about 10% over this period.
Looking forward, CFRA is calling for Allegion to compound its EPS at an annual rate of 9% over the next three years.
While this wouldn’t be the 13%+ that Allegion did over the last decade, it’d still be a great result.
CFRA believes that Allegion has multiple bottom-line growth levers to pull, including buybacks, tech-driven security upgrades across markets, data center growth (which is more new construction on buildings that must be highly secure), and strategic acquisitions.
For its part, Allegion is guiding for $8.10 in midpoint EPS for FY 2026, which would represent roughly 9% YOY growth – right in line with where CFRA is at.
If we take this forecast as a base assumption, that sets the dividend up for like-or-better (by virtue of the low payout ratio, which can be easily expanded) growth over the next decade or so.
That translates to more HSD-LDD dividend growth, circling back around to the earlier mention of a straightforward 10%+ annualized total return on a great business.
Hard to dislike that.
By the way, I think Warren Buffett’s Berkshire Hathaway Inc. (BRK.B) also found it hard to dislike, as the firm took a stake in Allegion during Q2 2025 – back when the stock largely had pricing similar to where it’s at now (after a 20% decline that started in the fall of 2025).
Being able to buy in at a similar level and invest alongside one of the world’s great investors is a compelling notion.
Financial Position
Moving over to the balance sheet, Allegion has a good financial position.
Its long-term debt/equity ratio is 1, while the interest coverage ratio is nearly 9.
Allegion also has investment-grade credit ratings: BBB, Fitch; BBB, S&P.
While this isn’t a bad balance sheet, I do view it as the weakest part of the business (if only because the rest of Allegion is so great).
Profitability is outstanding.
Return on equity has averaged 48.2% over the last five years, while net margin has averaged 15.5%.
ROE gets a boost from the balance sheet structure, but even ROIC is routinely north of 20%.
A hallmark of a wonderful business is high returns on capital, and Allegion is generating very high returns on capital.
Overall, I see so much to like about Allegion as a long-term investment.
And with economies of scale, brand recognition, a built-out distribution network, and a large installed base which leads to “stickiness” and recurring revenue, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Litigation, regulation, and competition are omnipresent risks in every industry.
Competition, in particular, is an issue, as this space is filled with very competent and fierce competitors.
Around half of the company’s revenue is tied to new construction, exposing the company to the issues therein (e.g., interest rates, macroeconomics, new construction demand, labor shortages, etc.).
Being an international company, Allegion faces geopolitics, supply chain concerns, and currency exchange rates, but the company’s US lean mitigates much of this.
The industry is increasingly moving toward digital/automated solutions, which means Allegion must continually stay ahead of the tech curve in order to not get left behind.
Allegion is a large, established, mature company in its space, meaning its growth may not shine relative to smaller competitors.
I do see some risks to be aware of, but Allegion’s quality and growth profile need to be considered.
Also, the stock’s recent 20% pullback, which has created what I think is an attractive valuation, also needs to be considered…
Valuation
The P/E ratio has dropped to 19.5.
While not super low in absolute terms in isolation, this is a terrific company that typically commands suitable multiples.
To that point, the stock’s five-year average P/E ratio is 21.3, so we’re decently below that level right now.
The P/CF ratio of 15.6, which is not egregious at all, is also well below its own five-year average of 18.4.
And the yield, as noted earlier, is higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a two-stage dividend discount model analysis.
I factored in a 10% discount rate, a 10-year dividend growth rate of 13%, and a long-term dividend growth rate of 8%.
The near-term dividend growth rate I’m assuming shouldn’t be a high hurdle to clear for a company that grew its EPS at 13%+ and its dividend at 17%+ over the last decade.
I’m building in a slowdown here, reflective of recent dividend growth deceleration and the three-year 9% EPS forecast.
With the payout ratio being as low as it is, a 13% dividend growth rate would not be challenging or unrealistic against 9% EPS growth.
I’m then expecting a natural slowdown in the future as the company continues to mature.
The DDM analysis gives me a fair value of $181.07.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
To me, this stock looks cheaper than it ought to be.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates ALLE as a 4-star stock, with a fair value estimate of $170.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates ALLE as a 5-star “STRONG BUY”, with a 12-month target price of $212.00.
I came out roughly in the middle. Averaging the three numbers out gives us a final valuation of $187.69, which would indicate the stock is possibly 23% undervalued.
-Jason Fieber
Note from D&I: How safe is ALLE‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 61. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, ALLE’s dividend appears Safe with an unlikely risk of being cut. Learn more about Dividend Safety Scores here.
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.
Disclosure: I’m long ALLE.