20 Strong Dividend Growth Stocks – Rock Solid Ranking Free Report

A while ago, I created the Rock Solid Ranking, a dynamic stock ranking list that shows a value for each dividend stock I follow. I’ve worked on calculations that consider several metrics in order to find the best companies among all those on the stock market. This list is particularly useful when the stock market is becoming highly valued (not overvalued yet in my opinion).

Each month, I’ll be sharing with you, for free, the top 10 dividend growth stocks for both the US and Canadian markets. You can download your report here:

July 2016 Top 20 Rock Solid Ranking

Previous reports:

June 2016 Top 20 Rock Solid Ranking

May 2016 Top 20 Rock Solid Ranking (I’ve skipped April, sorry!)

March 2016 Top 20 Rock Solid Ranking

February 2016 Top 20 Rock Solid Ranking

January 2016 Top 20 Rock Solid Ranking

November 2015 Top 20 Rock Solid Ranking

October 2015 Top 20 Rock Solid Ranking

September 2015 Top 20 Rock Solid Ranking

August 2015 Top 20 Rock Solid Ranking

July 2015 Top 20 Rock Solid Ranking

Why Update this list on a monthly basis?

The idea of providing you with an updated top 10 list monthly is to show how metrics and rankings can change from month to month. This becomes highly important during the earnings’ season as lots of new data come out at the same time and it’s hard to digest everything. The updated Rock Solid Ranking gives you a quick view in a few minutes of which companies are best or worst. This printer friendly report stands on a single page with lots of metrics to help you quickly analyze if the company deserves more attention for your next pick.

Out of this top 10 for each stock market, I review 2 companies each month; one US and one Canadian.

This month, I will review two companies that have one thing common: They both show graphs with all lines going up besides one…. The payout ratio! It’s hard enough to find strong stocks in such a volatile market, it’s even better when they can increase their dividend payment while dropping their payout ratios!

Reynolds (RAI) (ranking #17)

Reynolds American Inc, through its subsidiaries, manufactures cigarettes and other tobacco products in the United States. The brands include CAMEL, PALL MALL, WINSTON amongst others. Similar to Altria (MO), Reynolds is focused in the USA after selling their international rights. You have to note that the US market is not doing so well and there is approximately 3% to 4% less consumers of tobacco products each year. Why are both revenues and earnings going up? Because RAI merged with Lorillard. With this move, Reynolds is a solid #2 behind Altria owing 35% of the market while Altria owns 50%.

I think the company stock has skyrocketed and there is little more money left to be made. The stock price went up almost by 190% in the past 5 years (excluding dividend). However, with a PE ratio under 11 and a dividend yield over 3%, this could be a good opportunity for income seeking investors.

Reynolds have developed new products for their most famous brand CAMEL. They have also made a good marketing move by selling “premium” cigarettes that contains no addictive products. It is somewhat funny to think people with a smoking habit already are ready to pay for “non-addictive” cigarettes (like it is going to make any difference), but it works! Finally, RAI has also worked on Vuse, their e-cigarette brand with aggressive pricing in order to gain market share in a growing market.

Then again, this is the same story with cigarette markers; great money making company in a declining market. While it ranks high due to strong fundamentals, I’m more worried about the future for these companies. I think RAI is good for retirees as it will continue to pay a strong and increasing dividend for the upcoming 10-15 years. However, don’t expect much out of these companies over the long term, I don’t see how they can make the US tobacco market grow again.

Ritchie Bros. Auctioneers (RBA.TO) (ranking #3)

The reason why I like digging into our stock ranking so much is that it enables me to find new interesting companies. I haven’t read much about Ritchie Bros. Auctioneers in the news or on other blogs. Have you?

Ricthie Bros is the world’s largest seller of used heavy equipment. Considering the current slowdown in the economy, companies are more interested in purchasing older equipment at a fraction of the original price. Strong from its efficient network, RBA puts as many sellers and buyers in relation as possible.

While the threats of online startups eat up a part of this market (as Ebay did with consumers for example), RBA shows 50% of online sales made on their own website. The fact the company is going online will reduce their costs and most importantly, improve their margin (which were already good).

In their business model, RBA gets a commission on all sales completed. This seems like a no-brainer business model. However, in order to get the biggest share of this market, they mostly run no reserve auctions (meaning that any low bid could win a lot) while guaranteeing a minimum price to the seller. Therefore, in the event of a low bid winning, Ritchie Bros. would lose money on the transaction even after getting paid their commission.

Overall, this is a great example of a company who had success in the “old world” and made the right transition to the “new world” with strong online positioning. I think it could be interesting to watch RBA go in the upcoming months and see how management will cope with the fact that 25% of their business is coming from Canada, a country heavily affected by the oil turmoil.

How the Rock Solid Ranking is built

I personally use this list to manage my own portfolio along with portfolios I manage at Dividend Stocks Rock. This is not an ordinary ranking where we arbitrarily apply a score to dividend stocks. We actually build a dividend growth model where multiple factors are accounted for in the score calculation. We started by listing the most important metrics we follow before buying a stock. Here’s the list:

1 year Revenue Growth

5 year Revenue Growth

1 year Earnings per Share (Diluted) Growth

5 year Earnings per Share (Diluted) Growth

1 year Dividend Growth

5 year Dividend Growth

Dividend Payout Ratio

P/E ratio PEG

Dividend Yield

Debt to Equity ratio

Price to Book Value

Explanation of metrics used

In order for you to understand why I have decided to use the above mentioned metrics instead of others, I’m providing you with this complete explanation of how I came up with this ranking.

If a company can’t keep up its high ranking, it means its losing pace with one or more important metrics in our model. The more it loses ranking, the closer it is to joining the sell list. On the other hand, a company that improves its scores quarter after quarter definitely earns the buy mention as it shows it’s headed in the right direction. The Rock Solid Ranking goal is to provide you with an instant valuation of a stock according to our dividend growth investing model.

I’m not going to disclose our calculation methods here but I’ll tell you which metrics we follow. This can help you build your own investing model. Total score of a company could technically reach 100% if it was perfect on all attributes. The score can also be negative as we give penalties for negative growth numbers.

#1 SALES

In my opinion, if you don’t sell, you can’t make money. If you can’t make money, you can’t pay dividends. If you can’t increase your sales, you can’t increase your profits and you can’t increase your dividend. This is why revenue growth is so important. The best way to measure if a company is making more money is by looking at its revenue growth.

A company can run through a tough year or show erratic revenue movements. This is why we take a look at both 1 yr and 5 yr revenue growth. The first metrics to be used in our model are:

1 year Revenue Growth

5 year Revenue Growth

More weight is given to the 5 yr and penalties (negative score) are attributed to companies that show negative revenue growth. You can’t hope to increase your dividend consistently if your revenues decrease.

#2 PROFITS

Showing strong revenues is important, but it doesn’t guarantee you will get strong dividend payouts. Profits drive amounts to be paid through dividends. If you look at a company like Amazon (AMZN); revenues are huge but profit is thin. Therefore, they can’t hope to pay a dividend at this point in time (especially when your P/E is 574!).

In order to make sure we don’t give a high score to a company that recently restructured its costs or sold an important asset to boost its profits, we also consider 1yr and 5yr Earnings Per Share (EPS) growth.

1 year Earnings per Share (Diluted) Growth

5 year Earnings per Share (Diluted) Growth

Earnings and revenue growth combined together weigh a lot in our model. Both metrics combined together is the key for a sustainable business model. This is why so much weight (40%) is attributed to these 4 metrics.

#3 DIVIDEND METRICS

Once we have found companies with sales and profits, it’s time to take a look at what we desire most: dividend growth potential! In order to find out if a stock is not only a good stock but a good dividend stock, we use 3+1 different metrics. The “+1” is because we look at both 1yr and 5yr dividend growth percentages:

1 year Dividend Growth

5 year Dividend Growth

Dividend Payout Ratio

Dividend Yield

The 1 year dividend growth shows the company’s willingness (or capacity) to increase its dividend over a short period of time. The 5 year dividend growth confirms this willingness/capacity to keep increasing payments to shareholders.

Then, the dividend payout ratio is also very important to us. We penalize companies paying over 120% of their earnings. We didn’t select 100% as we must always take into consideration that the payout is in $ and profit is an accounting term (including amortization for example). This is why it’s important to give some room for high dividend payout ratio companies. We also give a smaller weight to companies with very low payout ratio (0-20%). This shows that the company would rather keep its money in their bank account instead of sharing the wealth with stockholders.

Finally, the dividend yield is also a debated topic. Some investors are looking at 5%+ dividend yield (I keep receiving tons of email telling me I look for low yield dividend stocks). Many investors (like me!) prefer sound businesses with dividend stocks around 3%. In the past four years, I’ve noticed that stocks paying over 4% often show shakier metrics than stocks with a lower yield. Dividend metrics combined together represent 40% of our ranking calculation.

#4 DEBT LEVEL

Another important consideration is the debt level of a company. The idea behind the choice of this is simple; debt payment requires cash flow, cash flow that could be used to pay dividends. You don’t want a company strangled by their debt and forced to make unfortunate decisions. This is why we use a debt ratio in our model:

Debt to Equity ratio

Here again, a high debt to equity ratio is penalized by negative points.

#5 STOCK VALUATION

Finally, the price you pay for a stock is also important. I’m the first one to pay a relatively high price for a great company. Still, if I can find a company that is relatively similar but traded at a cheaper price than another, I will definitely take a look at it.

We have used the following metrics in our system to give points to each stock:

P/E ratio PEG

Price to Book Value

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