Top 10 Dividend Growth Stocks and How to Choose Them
Stock Analysis & Ideas

Top 10 Dividend Growth Stocks and How to Choose Them

As we are heading into 2023, dividend growth stocks have been attracting increased investor interest. After a shaky 2022 and looming fears of a potential recession in 2023, many investors have now shifted their attention to companies that can provide growing and reliable dividends in an effort to reduce uncertainty and achieve more predictable returns.

I have set criteria in place that, if satisfied, should help you pick high-quality dividend growth names. I then apply these criteria to every single company in the stock market, creating a list with all names that satisfy my demands for your convenience. There are several names in there that can most certainly meet the needs of various types of income-oriented investors.

That said, it’s important to note that there is no one “best” dividend growth stock that will be suitable for everyone. The best dividend growth stocks for you will depend on your financial goals, risk tolerance, and other personal factors.

In any case, let’s get started!

Dividend Yield: Go for Stocks that Yield at Least 2.5%

When it comes to building a dividend growth portfolio for 2023, I believe that investors must set their dividend yield threshold to at least 2.5%. With interest rates on the rise, you want to make sure that you are receiving a solid, tangible return on your investment.

Any stock below this threshold, regardless of its dividend growth prospects, will hardly provide any meaningful payouts. The whole point of choosing dividend growth stocks for this upcoming year is to reduce uncertainty through noteworthy payouts, and anything below 2.5% will hardly do the job.

That said, note that while a higher yield may indicate a more generous dividend, it can also be a red flag if the yield is unusually high compared to other stocks in the same sector. Don’t be impulsively excited about high dividends, as there might be a catch in such stocks’ overall investment cases.

Financial Stability: Go for Consistent EPS Growth, Low Leverage

The next factor you want to make sure is satisfied when choosing dividend growth stocks is a company’s financial stability. Go for companies with strong balance sheets and a consistent track record of profitable growth. This is crucial for their dividend growth prospects to remain robust. Hence, I have set two individual criteria that must be satisfied here:

  • A 10-year EPS growth CAGR of at least 5%.
  • A net debt/EBITDA that doesn’t exceed 2.5X.

This way, we confirm that the companies we are looking at have already established a strong track record of growing profits while their debt levels remain reasonable against their EBITDA generation. A reasonable net debt/EBITDA level is crucial in a rising rates environment, as elevated indebtedness could compress profit margins if a company can’t deleverage fast enough.

Each company can have a different “reasonable” net debt/EBITDA level based on its business model. That said, generally speaking, our threshold should do just fine for what we want to achieve here. A negative ratio means the company has a positive net cash position, which is great!

Dividend Growth: Proven Track Records That Can be Sustained

Stocks that already feature an established dividend-growth track record should inspire confidence and trust with regard to their overall resiliency and management’s focus on growing payouts. We also want to make sure that dividend hikes have been meaningful and not by tiny rates. Thus, the next two criteria that I have applied are the following:

  • At least 10 years of consecutive annual dividend increases.
  • A 10-year dividend per share CAGR of at least 5%.

Simultaneously, you want to make sure that dividend growth can be sustained. However, instead of looking at a company’s payout ratio to determine if this is the case, I have chosen a somewhat different route. My demand now is that analysts project an EPS CAGR of at least 5% over the next 5 years.

This way, we can ensure that dividend growth of at least 5% can be sustained moving forward. This is a bit tricky, but it makes sense considering the companies we have selected already feature a 10-year dividend per share CAGR of at least 5%. We want this trend to persist.

The Valuation: Don’t Overpay

It’s generally a good idea to look for dividend stocks that are reasonably valued, which can help to reduce the risks related to overpaying for a stock (i.e., a potential valuation compression which could limit returns). For this reason, I have set the maximum forward P/E threshold at 20. Of course, this is an arbitrary number. Nonetheless, it should help us bar expensive stocks.

Combining All of the Above

If we merge the above criteria and apply them to every single stock in the U.S. stock market, we come out with a fantastic list of 17 top dividend growth stocks to consider for 2023. Here is the full list since not everyone’s top 10 will be the same:

NameYears of Dividend GrowthDPS/CAGR (10Y TTM)P/E (NTM)EPS CAGR (10Y TTM)EPS – Est YoY % (FY5E)Div Yield (Ind)Net Debt / EBITDA (FQ)
Merck & Co. Inc. (NYSE: MRK)115.2%15.310.6%6.2%2.7%0.8
Broadcom Inc. (NYSE: AVGO)1139.4%13.328.0%6.3%3.4%1.3
Cisco Systems Inc. (NASDAQ: CSCO)1215.4%13.16.0%6.9%3.2%-0.6
QUALCOMM Incorporated (NASDAQ: QCOM)2011.9%10.914.1%6.5%2.7%0.6
3M Company (NYSE: MMM)649.9%11.76.2%9.0%4.9%1.6
Corning Incorporated (NYSE: GLW)1213.4%15.45.2%10.2%3.4%2.0
T. Rowe Price Group Inc. (NASDAQ: TROW)3613.4%15.510.5%5.2%4.4%-0.7
Tyson Foods Inc. (NYSE: TSN)1227.7%9.418.2%7.8%3.1%1.5
Principal Financial Group Inc. (NASDAQ: PFG)157.3%12.524.2%8.6%3.0%0.1
Best Buy Co. Inc. (NYSE: BBY)1921.6%12.38.9%11.3%4.4%0.9
Snap-on Incorporated (NYSE: SNA)1315.4%13.512.6%5.9%2.9%0.4
Celanese Corporation (NYSE: CE)1226.7%8.814.3%8.4%2.8%1.5
Unum Group (NYSE: UNM)1428.2%6.519.2%8.4%3.3%1.4
Williams-Sonoma Inc. (NYSE: WSM)1613.2%7.921.4%23.5%2.7%0.7
Polaris Inc. (NYSE: PII)266.7%9.37.2%24.4%2.6%1.5
Lincoln National Corporation (NYSE: LNC)1118.9%3.423.4%8.5%6.2%-0.7
The Scotts Miracle-Gro Company (NYSE: SMG)128.0%12.615.9%10.8%5.6%-29.0



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