Dividend stocks are one of the key components of a value investor's portfolio. The regular income provides increasing liquidity and compensation as you wait for the valuation thesis to play out. Typically, dividends tend to be a bonus as most value investing screens are run for valuation first. However, I also like to look at strong dividend stocks and then filter for undervaluation. These do not always offer strongest value stocks, but these will help protect your portfolio by including quality names that can weather a stock market downturn as I do expect to arrive any time soon.
This is Part 2 of the Dividend Stocks screen. Part 1 was posted earlier and covered dividend stocks in Industrials and Materials sectors.
This screen looks for quality stocks that pay a great dividend and are reasonably undervalued. The quality is determined by several dividend policy attributes, such as, dividend yield, historical dividend growth rate and the sustainability of the dividend as evidenced by the dividend coverage. A Price/Earnings ratio check keeps the valuation to be reasonable.
- Market capitalization > $30 million
- Dividend yield in top 20% of the market
- Dividend growth rate in top 40% of the market
- Dividend coverage in top 60% of the market
- P/E ratio < 15
- Sector is Information Technology or Health Care
The screen was run using the Fidelity screener.
A great sustainable dividend yield, potential of dividend growth and good valuation allows you to buy and hold these stocks for a reasonably long term.
The Screen Results
div growth rate (5 yr average)
p/e (Price/ttm earnings)
Seagate Technology Plc
Western Union Co
Kewaunee Scientific Corp
Notes and Observations
- STX: Seagate makes data storage solutions. The dividend is great and the company is robust, however the stock is close to fair valuation. There is also trade war risk. It would need to be available at a greater discount to be of interest.
- WU: Stagnant business, not enough value.
- KEQU: Kewaunee Scientific makes laboratory, health care and technical furniture products. The company had a disastrous fiscal year 2019 and underwent several management changes. The company is ripe for a turnaround and the stock can be very interesting if the issues are temporary. This is a small $55 million market cap company, so be aware of the liquidity issues in the stock. This also is the kind of company that has done very well in the past for the VSG members, and I am intrigued enough to add to the watchlist and take a deeper look for potential investment.
While dividends are nice, we generally do not overlook the valuations. Of the 3 companies in the sectors we investigated in this screen, KEQU is the one stock that is intriguing enough to consider it further. This is being added to the VSG watchlist.
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