In brief:
- Dividend Aristocrats are a good source for dividend growth investors. The question is when is a good time to buy and which stocks should be avoided since they are overvalued.
- We use the 5-year dividend yield average as an important metric to determine the valuation of a dividend stock.
- This article lists 5 undervalued and overvalued dividend aristocrats.
As a dividend growth investor, you could narrow the universe of stocks you willing to consider for your investment to dividend stocks that are undervalued (“to buy”) or overvalued (“to avoid”). We will zoom in on and discuss five undervalued and five overvalued Dividend Aristocrats, their valuation, dividend yield, and performance. This 5+5 list can be a good starting point for further research, and find the right dividend stock for your portfolio.
Determining undervalued dividend stocks
For selecting the top-5, we use the theory that for stable business dividend stocks, like the dividend aristocrats, their dividend yields tend to return to the historical average over time. In this case, a dividend stock is undervalued when the current yield is higher than the 5-year dividend yield average. In general, there could be two reasons for an above-average yield: the stock price is down, and/or the dividend has increased.
We use a “Dividend Channel” as a visualization tool. The chart below shows how AT&T is how the stock is moving within a channel. As parameters, we used a dividend yield of 4.4% (top) and 7.3% (bottom) and the 5-year average yield. For example, a low share price, like during the COVID-19 dip in March 2020, results in a high dividend yield. Please note that the yearly dividend increases cause the channel boundaries to rise as well.
Exxon Mobil as an example in more detail
Exxon Mobil (XOM) has a current dividend yield of 5.59% which is 11% above its 5-year average of 5.01%. This indicates that this dividend stock is (current yield – average yield)/current yield = 12% undervalued. Assuming the dividend payout remains the same, the share price must increase to lower the dividend yield.
To return to the historical average dividend yield, the stock price has to increase by 12% in the next 5 years. This translates into an extra annual 2.2% increase for the stock in the next 5 years. Essential in this model is that this dividend is able to continue its streak of dividend increases.
The chart above is available on every detailed stock page for further analysis and also presented in a table format.
5 Dividend Aristocrats To Buy
So, here is the list of Dividend Aristocrats “to buy”, based on the valuation method using the highest percentage above average five-year historical yield. The five dividend aristocrats are considered to be “undervalued”. Typically, those stocks did not perform that well over the past period / saw a drop in their share price and did manage to grow their dividend payout. The table includes the current dividend yield and difference (%) with the 5-year average.
5 Dividend Aristocrats To Avoid
Here are the five Dividend Aristocrats “to avoid”, based on the valuation method using the highest percentage above average five-year historical yield, the five dividend aristocrats are overvalued. Typically those dividend aristocrats showed a strong performance over the past and higher share prices. The table includes the current dividend yield and difference (%) with the 5-year average.
When you have concerns about the dividend safety please include some of the dividend safety metrics as well in your assessment.
By using this “5 to Buy And 5 To Avoid list”, you may find some opportunities worthwhile considering.
