Having a lot of money is nice.
But it’s not so nice if it comes at the expense of having no time.
Unfortunately, that’s the common trade-off we make: money for time (via working).
Well, what if we could have money without giving up time?
That profound idea is at the core of using dividend growth investing to achieve financial independence.
Dividend growth investing is a long-term investment strategy whereby one buys and holds shares in high-quality businesses which are steadily rewarding shareholders with ever-larger cash dividends.
You can find hundreds of examples by pulling up the Dividend Champions, Contenders, and Challengers list.
This list has data on US-listed stocks that have raised dividends each year for at least the last five consecutive years.
The dividend growth investing strategy is such a powerful way to achieve financial independence because simply generating enough passive dividend income to offset all bills is total freedom, and that dividend income is rising over time so as to not lose what one worked hard for.
I speak from experience, using this strategy as a framework to build the FIRE Fund.
That’s my real-money portfolio generating enough five-figure passive dividend income for me to live off of.
Now, dividend income and financial independence are central themes within dividend growth investing.
However, so is valuation.
And that’s because price only tells you what you pay, but value tells you what you ultimately 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.
Routinely using one’s savings to acquire undervalued high-quality dividend growth stocks is a purpose-built method for achieving financial independence, allowing one to detach from selling time to earn money.
Of course, having an idea of what’s undervalued means one already knows what valuation is all about.
That’s where Lesson 11: Valuation comes in handy.
Written by fellow contributor Dave Van Knapp, it’s a useful guide which explains what valuation is and how to apply simple principles toward estimating a company’s fair value.
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…
Intuit Inc. (INTU) is an American multinational software company.
Founded in 1983, Intuit is now a $75 billion (by market cap) software giant employing more than 18,000 people.
Intuit specializes in financial software, primarily via flagship offerings TurboTax (the #1 tax preparation software for individuals in the US) and QuickBooks (the #1 accounting software for small and mid-sized businesses in the US).
In addition, Intuit controls Mailchimp (a marketing platform) and Credit Karma (used for checking/managing credit scores).
Intuit’s revenue is derived in a rough 60/40 split between businesses (via QuickBooks) and consumers (via TurboTax).
Intuit’s dominant positioning across two verticals gives it unique advantages in the marketplace.
Both of its flagship offerings lead to sticky clientele, as it’s not practical to switch accounting software or tax preparation software once someone is already in an ecosystem.
TurboTax, in particular, makes it easy for users to stick with year after year, as historical returns are embedded and form imports are seamless.
Moreover, Intuit has added complementary products around the core offerings, giving the company access to cross-selling opportunities and synergies (further locking in clientele).
This “lock in” and then “step up” strategy has led to fantastic results for Intuit.
All that said, this is one of the strangest disconnects between fundamentals and sentiment that I’ve ever seen.
If you didn’t know anything about the stock market and looked only at the company’s actual KPIs, you’d probably presume Intuit’s stock was doing incredibly well.
However, due to fears over AI encroachment, the sentiment around this stock is extremely poor, sending the stock down about 65% since last summer.
This total nosedive in the stock, despite Intuit’s fundamental operating metrics remaining quite strong, has led to my coverage of this name for the first time ever.
From what I see, Intuit’s business continues to ring up higher revenue and profit, all while growing its dividend aggressively.
Dividend Growth, Growth Rate, Payout Ratio and Yield
Indeed, Intuit has increased its dividend for 15 consecutive years.
A nice start to something even bigger.
The 10-year dividend growth rate of 15.2% is also really nice, but what’s even nicer is the consistency: Intuit increases its dividend by about 15% almost every single year.
Along with that mid-teens dividend growth is the stock’s 1.7% yield.
Although that’s not a super high yield on its own, that’s actually higher than I’d expect it to be with this kind of growth profile.
Oftentimes, mid-teens growth requires a much larger sacrifice when it comes to yield.
By the way, this yield is 110 basis points higher than its own five-year average, so that larger sacrifice that’s been made in the past is not currently being asked for.
Since the payout ratio is only 29.3%, Intuit’s dividend is poised to continue down its double-digit growth track.
I’m very impressed by Intuit’s overall dividend profile.
Revenue and Earnings Growth
As impressive as it may be, though, much of it is shaped by the past.
However, investors must always be contemplating the future, as today’s capital ultimately gets risked for tomorrow’s rewards.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will come into play when the time comes later to estimate fair value.
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.
I’ll then reveal a professional prognostication for near-term profit growth.
Lining up the proven past with a future forecast in this manner should allow us to confidently gauge where the business might be going from here.
Intuit grew its revenue from $4.7 billion in FY 2016 to $18.8 billion in FY 2025.
That’s a compound annual growth rate of 16.7%.
Blistering top-line growth here.
Meanwhile, earnings per share surged from $3.69 to $13.67 over this period, which is a CAGR of 15.7%.
Extraordinary growth out of Intuit.
We can now see that 15% dividend growth has been clearly supported by 15% EPS growth, which explains why the payout ratio is still so low.
Looking forward, CFRA believes that Intuit will deliver a 15% CAGR in its EPS over the next three years,
Noticing a theme yet?
That 15% number keeps coming up.
CFRA sees Intuit supported by its strong market position across both consumer and professional tax segments.
In addition, the company is embarking on a cost-savings program by slashing nearly 20% of its workforce in an effort to right-size the company.
There’s also the matter of AI, which could be a double-edged sword.
On one hand, CFRA notes early signs of AI features augmenting overall platform tools and providing additional monetization opportunities.
On the other hand, there’s the fear that AI agents will one day (and not long from now) be doing tax returns outright.
Simultaneously, there’s the matter of the IRS itself offering its “IRS Free File” to taxpayers in order to make tax returns easier and cheaper to complete.
However, again, there’s a certain “stickiness” to tax return platforms, bolstered by capabilities and embedded information.
You tend to get what you pay for.
And tax returns are almost like snowflakes, in the sense that each one is unique.
Due to individual return complexities, agents and IRS tools may prove to be minimal threats.
IRS tools are not new anyway.
Circling back around to CFRA’s forecast, Intuit’s own FY 2026 guidance calls for YOY EPS growth of roughly 16%.
While I’m not convinced that AI will completely eat this company’s lunch, a modest slowing over time is certainly possible.
Then again, Intuit doesn’t need to grow at 15% per year in order to be a great investment from here.
The market has already judged Intuit harshly and sent its stock down by more than 60% over the last year – regardless of the veracity of the AI danger – setting things up very nicely for those looking to get in after the carnage.
I think Intuit is poised for more mid-teens dividend growth, fueled by a combination of at least low-double-digit EPS growth and a flexible payout ratio.
Layering that on top of the starting yield gets one to a mid-teens type of annualized total return – before/without any kind of multiple recovery.
Awfully nice, in my view.
Financial Position
Moving over to the balance sheet, Intuit has a fantastic financial position.
Its long-term debt/equity ratio is 0.3, while the interest coverage ratio is over 20.
Moreover, total cash nearly offset all long-term debt.
Intuit’s very high credit rating of A from S&P further demonstrates the firm’s financial might.
The balance sheet isn’t quite as amazing as it was a decade ago – back when Intuit carried net cash – and that’s largely due to Intuit’s $12 billion acquisition of Mailchimp in 2021.
However, despite some modest decay, the balance sheet remains a pillar of strength.
Profitability is outstanding.
Return on equity has averaged 18.8% over the last five years, while net margin has averaged 18.6%.
ROIC is also typically in a mid-teens range.
Intuit’s high returns on capital and fat margins are impressive, but they’re not quite as impressive as they were before the Mailchimp acquisition.
Overall, although I think Intuit isn’t quite as sharp as it used to be, this remains a top-tier firm.
And with economies of scale, brand recognition, switching costs, embedded information, and compliance capabilities, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Competition, regulation, and litigation are omnipresent risks in every industry.
Competition is likely only going to increase vis-à-vis AI, although AI also gives Intuit an ability to provide extra tools and value to its users (such as through in-house agents).
The Mailchimp acquisition has degraded the balance sheet and profitability without clear accretive rewards.
Speaking of this, Intuit hasn’t shown an ability to effectively engage in value-added M&A at scale in order to diversify the firm, which means Intuit’s success (or lack thereof) over time will almost completely depend on how resilient QuickBooks and TurboTax remain.
Some of the company’s products are arguably starting to become expensive, which may filter more users toward low-cost/free options (such as IRS Free File).
I don’t view the totality of the risk package here as all that substantial.
But the market is singing a different tune, sending this stock down more than 60% over the last year and compressing multiples across the board…
Valuation
The P/E ratio has dropped all the way down to 16.9.
For a company growing at a mid-teens rate, that puts the PEG ratio at about 1.
To put this in perspective, the stock’s own five-year average P/E ratio is 51.7.
It’s now 1/3 of that.
Now, I’d argue the multiples simply became too high in the first place, which means some of this recent drawdown is deserved, but the market rarely acts in a way that’s perfectly rational.
Instead, the market almost always drastically overshoots (which I think is exactly what happened in this case).
Nonetheless, the P/CF ratio of 9.1, which is silly low for a company of this quality, is also about 1/3 of its own five-year average of 28.5.
And the yield, as noted earlier, is significantly 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 15%, and a long-term dividend growth rate of 7%.
The assumption for a near-term continuation of that 15% growth rate, which shows up over and over, seems almost obvious.
There’s just nothing to indicate that Intuit can’t or won’t deliver this kind of dividend growth over the next several years.
After that, though, I’m building a larger drop in growth than I usually do, only because of the uncertainty that AI is introducing.
While the next five to ten years looks terrific, it’s much harder to say how Intuit fares when going out beyond that mark, which is why I’d rather err on the side of caution.
The DDM analysis gives me a fair value of $328.82.
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.
My view here is that a large portion of the recent 60%+ drawdown was deserved, but it’s gone a bit too far and created an attractive valuation.
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 INTU as a 4-star stock, with a fair value estimate of $455.00.
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 INTU as a 3-star “HOLD”, with a 12-month target price of $347.00.
A bit of a spread, and I came out light (owed to my caution). Averaging the three numbers out gives us a final valuation of $376.94, which would indicate the stock is possibly 26% undervalued.
-Jason Fieber
Note from D&I: How safe is INTU‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 98. 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, INTU’s dividend appears Very Safe with a very 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 have no position in INTU.