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Premier Dividend Growth Stocks: Is There Any Value? A Sector By Sector Summary Review - Part 1

Summary

How overvalued have dividend growth stocks become?

There are only a few fairly valued Dividend Aristocrats.

Looking for value in the Dividend Aristocrats, a sector by sector review.

Introduction

As a value investor, I must admit to being very frustrated with the valuations I'm seeing on high-quality blue-chip dividend growth stocks. I have been vigorously searching for fairly valued dividend growth stocks to invest in. I have thoroughly screened and evaluated every company in the S&P Dividend Aristocrats, all three of the CCC (Champions, Contenders and Challengers) lists produced by David Fish, every dividend paying stock on the S&P 500, Fortune 500, NASDAQ 100, S&P 100 Large-cap, Dow Jones Industrial Average, and even the S&P 400 mid-cap universe.

Much to my chagrin, I have found the pickings to be quite slim indeed. It seems rather obvious to me that low interest rates and a large appetite for yield in an environment where fixed income yield is low, has driven valuations of high-quality blue-chip dividend growth stocks to unprecedented levels of high valuation. Consequently, the vast majority of my favorite and preferred dividend growth stocks are beyond a level of valuation that I would be comfortable investing at. In short, and in my opinion, this is a tough market for the value focused dividend growth investor.

On the other hand, I am on record many times of stating that it is a market of stocks and not a stock market. More recently, I have also added the idea that it is also a market of sectors. What these statements imply is that regardless of the level of the overall market, there will always be value to be found. Naturally, it's easier to find value in a bear market than it is in a raging bull market like we have had for the past several years. As it relates to my market of sectors statement, this implies that various sectors of the market can be valued quite differently than the overall market at large.

From the perspective of diversification, this can be problematic because if there are only a few sectors where attractive valuation can be found, it then becomes quite difficult to construct a properly diversified dividend growth stock portfolio. As I've been searching through the lists referenced above, most of the good valuations I have seen have been limited to only a few sectors. Moreover, some of those sectors, the energy sector for example, are rife with problems and challenges. Consequently, many blue-chip energy related companies such as Chevron and Exxon are trading at or near low historical prices. However, their current valuations (P/E ratios) are very high because earnings have fallen precipitously. Lower stock prices in the energy sector come with higher levels of risk today. When looking for attractive valuation, it is typically found in unpopular companies and/or sectors.

In other words, there is almost always a reason behind attractive valuations. Sometimes the reasons are valid and real, sometimes they are exaggerated, and sometimes they are completely unfounded. The trick is to understand and evaluate the reasons in order to determine if they are systemic or isolated, temporary or permanent, real or unreal. This is not always easy to do, and in my opinion, can only be done through comprehensive research and due diligence.

In order to keep this article of reasonable length, I offer the following fair valuation sector by sector review of the 50 constituents in the S&P 500 Dividend Aristocrats. For each of the nine major sectors comprising the S&P Dividend Aristocrats, I will provide, where possible, an earnings and price correlated F.A.S.T. Graphs example of a fairly valued and overvalued company in each sector. Additionally, I will add brief commentary regarding the relative valuation levels of the overall sector.

The key to gaining the maximum benefit and insight from these earnings and price correlated graphs is to recognize that the orange line on the graph is offered as a fair valuation reference line. Moreover, it's also important to recognize that the P/E ratio of the orange line is the same all the way across the graph. The actual P/E multiple is listed in the orange rectangle in the FAST FACTS color-coded boxes to the right of each graph.

Once you are fully conscious of the P/E ratio multiple of the orange line, the next thing to key in on is how the price (the black line on the graph) tracks the orange line over the long-term historical period...


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