Top Holdings Of Dividend ETFs (Part 3: Hidden Gems In June 2020) (2024)

Part 1 of this article presented the top 50 holdings of 47 dividend-paying ETFs. To rank these holdings, I use a proportional scoring system that favors larger investments and larger ETFs. The top-ranked stocks in June 2020 are Apple (AAPL), followed by Microsoft (MSFT), Verizon Communications (VZ), and Johnson & Johnson (JNJ).

The top 50 holdings are not distributed evenly among the 11 GICS sectors. For example, the Information Technology sector has eleven members in the top 50 list, whereas the Materials sector has none. For investors looking to build a diversified portfolio, such an uneven distribution is not very helpful. For this reason, I presented the top 7 stocks in each GICS sector in Part 2 of this article.

In Part 3, I'm showcasing high-quality stocks not covered in Part 1 and Part 2. These are Hidden Gems that may be of interest to contrarian dividend growth investors seeking investment opportunities outside the prevailing sentiment of the time.

Hidden Gems

In my analysis of dividend ETFs, I found 349 unique tickers out of a total of 1,175 (top 25 tickers of 47 ETFs). Of the 349 stocks, 225 pay dividends and also appear in Dividend Radar, a list of stocks trading on US exchanges that have dividend increase streaks of at least five years.

I ranked the 225 stocks using a proportional scoring system that favors larger investments and larger ETFs. In essence, the ranking attempts to capture the prevailing sentiment of the time, at least from the view of dividend growth investors. Higher-ranked stocks appear in more ETFs and have relatively larger allocations in those ETFs. They are "popular".

From a contrarian view, though, can we find high-quality dividend growth stocks that are not yet "popular"? Quite possibly, such stocks would offer favorable valuations and larger upside potential. I call higher-quality, lower-ranked stocks Hidden Gems.

To assess quality, I use DVK Quality Snapshots. Developed by David Van Knapp, the system scores five quality indicators from widely used, trusted sources, arriving at an overall quality score out of 25 points. I rate dividend growth stocks based on their quality scores, as follows:

Author's rating system for quality scores of DVK Quality Snapshots

Below, I present Hidden Gems with quality scores of 23 and above. These are dividend growth stocks rated Exceptional and Excellent.

In the first table, Rank is the stock's rank as determined by my proportional scoring system. Freq indicates the number of dividend ETFs that contain Ticker in their top 25 holdings. Years are the number of consecutive years of dividend increases; Yield is the forward dividend yield and 5-DGR is the compound annual dividend growth rate over a 5-year period, where available.

The table includes a column for the Chowder Number (CDN), a popular metric that favors dividend growth stocks likely to produce annualized returns of at least 8%. The CDN column is color-coded to indicate the likelihood of delivering annualized returns of at least 8%. Green means likely, yellow means less likely, and red means unlikely. I consider green CDNs favorable.

I also provide a fair value estimate (FV) to help identify stocks that trade at favorable valuations. Stocks trading below my fair value estimate are shaded green in the Price column. To estimate fair value, I reference fair value estimates from several sources, ignore the outliers (the lowest and highest values), and use the average of the median and mean of the remaining values as my fair value estimate.

Stocks I own are highlighted in the Ticker column.

The second table presents the quality indicators that make up the quality score:

• Value Line (VL) - Safety Rank (1 is best) and Financial Strength rating
• Morningstar (M*) - Economic Moat
• S&P Global (S&P) - Credit Rating (obtained from F.A.S.T. Graphs)
• Simply Safe Dividends (SSD) - Dividend Safety

Hidden Gems rated Exceptional (quality score of 25)

Source: Created by the author using data from Dividend Radar

Dividend Champion ADP provides technology-enabled human capital management solutions and business process outsourcing solutions.

ADP is an undersized position in my DivGro portfolio and wouldn't mind increasing my position now that ADP is discounted. Doing so would reduce my average cost basis and increase my average yield on cost (YoC). (I consider a full position to be about 1% of total portfolio value).

Below is a F.A.S.T. Graphs chart of ADP. In the chart, the black line represents the share price and the blue line represents the calculated P/E multiple at which the market has tended to value the stock over time. The orange line is the primary valuation reference line. It is based on one of three valuation formulas depending on the earnings growth rate achieved over the time frame in question. (The Adjusted Earnings Growth Rate represents the slope of the orange line in the chart.)

Source: F.A.S.T. Graphs

ADP's price line just bounced above the stock's normal P/E ratio, so according to F.A.S.T. Graphs, the stock is trading at a premium valuation. (My fair value estimate includes a forward-looking component, somewhat represented in the F.A.S.T. Graphs chart by the dashed lines.) An investment in ADP in July 2010 would have returned 17.1% on an annualized basis (with dividends included). In comparison, the S&P returned 12.8% over the same period.

Hidden Gems rated Excellent with a quality score of 24

Source: Created by the author using data from Dividend Radar

Except for CL, I own all of the stocks in this group.

Dividend Champions MDT and GD and Dividend Contenders UNP and HON all trade at discounted valuations. Of these, only MDT does not have a favorable CDN.

My positions in GD, HON, and UNP are somewhat smaller than full positions, so I'll be looking into adding shares of these Hidden Gems.

GD is discounted most, so let's consider a F.A.S.T. Graphs chart of this stock:

Source: F.A.S.T. Graphs

GD's price line is below the primary valuation line and below the stock's normal P/E ratio, so it is trading below fair value. An investment in GD in June 2010 would have returned 9.4% on an annualized basis (with dividends included). In comparison, the S&P returned 11.4% over the same period.

Hidden Gems rated Excellent with a quality score of 23

Source: Created by the author using data from Dividend Radar

I own three of the stocks in this group. The exception is ECL, which has a fairly small yield and a solid 5-year DGR, though not large enough to push ECL's CDN into a favorable range.

None of the stocks I own are discounted, though BLK and APD are trading near fair value. My BLK position is outsized, while my APD position is undersized. Nevertheless, I'm not really interested in increasing my APD position at this time, as the stock's CDN is unfavorable.

Let's instead take a look at a F.A.S.T. Graphs chart of BLK:

Source: F.A.S.T. Graphs

BLK's price line is above the primary valuation line and slightly above the stock's normal P/E ratio, meaning BLK is trading a little above fair value. An investment in BLK in January 2010 would have returned 9.9% on an annualized basis (with dividends included). In comparison, the S&P returned 11.4% over the same period.

Hidden Gems rated Fine with a quality score of 22

Source: Created by the author using data from Dividend Radar

I own six of the stocks in this group: CB, PNW, SBUX, SYK, TROW, and TRV.

Only PNW and SBUX have favorable CDNs and trade at discounted valuations. My PNW position is undersized, so I wouldn't mind adding shares at this time. I think SBUX is worth considering, but it already occupies a full position in my portfolio.

Here's a F.A.S.T. Graphs chart of PNW:

Source: F.A.S.T. Graphs

An investment in PNW in January 2010 would have returned 9.7% on an annualized basis (with dividends included). In comparison, the S&P returned 11.4% over the same period.

It has been more than four years since PNW has traded at a discounted valuation, so I think it is a good time to turn my PNW position into a full one!

Undervalued Stocks Rated Fine (quality scores of 19-21)

As a bonus, here are stocks with quality scores (Qual) of 19-21 that are presently undervalued:

Source: Created by the author using data from Dividend Radar

I own two of these: CMI and WBA. Both are oversized positions in my portfolio.

Concluding Remarks

This three-part article presented an analysis of the top holdings of dividend ETFs, the top-ranked stocks by GICS sector, and several high-quality Hidden Gems.

I hope the article series provides dividend growth investors with valuable information. Certainly, while the work involved is extensive, I always find the results very illuminating and helpful in managing my own dividend growth portfolio.

As always, please do your own due diligence before investing in any of the stocks mentioned.

Thanks for reading and happy investing!

FerdiS