In this part 1 of this 2-part series I will present my top 10 blue-chip dividend growth stock research candidates in order of the highest S&P credit rating to the lowest. The stocks are: Johnson & Johnson (NYSE:JNJ), Wal-Mart Stores, Inc. (NYSE:WMT), Cisco Systems, Inc. (NASDAQ:CSCO), International Business Machines Corp. (NYSE:IBM), Procter & Gamble Co (NYSE:PG), Royal Bank of Canada (NYSE:RY), Cummins Inc. (NYSE:CMI), QUALCOMM, Inc. (NASDAQ:QCOM), Archer Daniels Midland Company (NYSE:ADM), and AFLAC Incorporated (NYSE:AFL).

All but 2 of these top 10 blue chips are currently available at my fair valuation baseline P/E ratio of 15 or lower. When I cover them individually I will argue that the two exceptions, Johnson & Johnson and Procter & Gamble, could be considered worthy of a modest premium valuation.

The average current dividend yield of this top 10 list is slightly in excess of 3%.  But more importantly, most of them are Dividend Champions or Aristocrats with long histories of increasing their dividends every year.  In each specific example, I will present calculations of potential future total returns on the same basis that I did with the S&P 500 index above.

Johnson & Johnson

Johnson & Johnson with its AAA credit rating and low debt-to-capital ratio is arguably the highest quality dividend growth stock on the planet.  Although it’s blended P/E ratio at 16.5 is moderately above my baseline valuation reference, I believe the company is worthy of this modest premium especially considering its current yield of 3%.

On the other hand, when you pay a premium for quality, you must simultaneously be prepared to accept a lower rate of return as a result.  The following rate of return calculation based on consensus estimates would indicate a 5% annual total return through investing in Johnson & Johnson out to 2017.  It should be noted that the majority of this return would be supplied by Johnson & Johnson’s expected total cumulative dividends.  Consequently, I offer Johnson & Johnson as a safe research candidate offering above-average yield.

Regarding analyst estimates, the following analyst scorecard indicates a perfect record on this bluest of blue-chips dividend growth stock.  Consequently, I offer the expectations of the above calculated total annual return with high confidence.


High-quality dividend growth stock Wal-Mart Stores Inc. has fallen over 14% since the beginning of the year as a result of recent earnings weakness.  This brings it comfortably down to my baseline fair valuation level.

Wal-Mart’s earnings are expected to recover next year and the following two years thereafter.  Assuming a fair value P/E ratio of 15 based on consensus earnings estimates out to 2017 indicates a  total annual rate of return in excess of 7%.

The analyst scorecard on Wal-Mart is almost as impressive as what we saw with Johnson & Johnson.  However, it should be noted that the only miss that analysts recorded since calendar year 2000 was for the last fiscal year when earnings were slightly down.

Cisco Systems, Inc

Cisco Systems Inc has only paid a dividend since fiscal year 2011.  However, its dividend growth rate has been impressive.  With a current P/E ratio of 13 and a dividend yield of 3%, I believe Cisco represents an excellent value at these levels.

It should be noted that Cisco has only commanded a historical normal P/E ratio of 14 since fiscal year 2007.  This is clearly below my fair value baseline P/E ratio of 15.  However, even if you only assume that Cisco’s stock price moves to a P/E ratio of 14 by fiscal year-end July 2018, and further assume that analysts estimates are correct, this research candidate offers the potential for double digit returns in excess of 12% per annum.

It was not a surprise to see that the analysts scorecard on Cisco was not perfect.  After all, this is a tech stock and therefore, prone to moderate cyclicality.  Nevertheless, the company’s low valuation and 3% dividend yield indicate that AA- rated Cisco is attractive at current levels.

International Business Machines Corp.

IBM, once considered one of the bluest of blue chips, has been recently maligned due to earnings weakness.  However, I believe that IBM’s extremely low valuation and high dividend yield warrant consideration.

When calculating the potential future return on IBM out to fiscal year-end 2017, I chose to utilize a conservative P/E ratio valuation only moving to 12.8.  Although analysts expect only moderate growth for the next couple of years, today’s current low valuation would indicate high double digit return potential.

Considering that future growth expectations are rather low, coupled with a reasonably high scorecard, I have confidence that IBM represents an attractive long-term opportunity.  To be clear, I believe that much of the risk associated with investing in IBM is already reflected in its low valuation.

Procter & Gamble Co

Procter & Gamble is a blue-chip dividend growth stock that has historically commanded a premium valuation.  Recent softness in earnings’ performance has driven the stock down approximately 10% since the beginning of the year.  Although this blue chip offers little in the form of growth, its dividend yield of 3.5% is worthy of consideration.

Utilizing the company’s historical normal P/E ratio of 17.8 as a target, Procter & Gamble offers the potential to generate annual returns in excess of 7% out to fiscal year-end June 2018.  However, it should be noted that more than half of that return is expected to come from dividends.

The most comforting aspect of the analyst scorecard on Procter & Gamble is the 2-year forward forecast record.  Consequently, this gives me confidence that Procter & Gamble might deliver on analysts’ expectations over the next couple of years.

Royal Bank of Canada

Royal Bank of Canada is considered one of the best Canadian banks.  I found this research candidate interesting because it is a dual-listed security.  The following earnings and price correlated FAST Graph looks at Royal Bank as it’s listed on the New York Stock Exchange.  Consequently, this is the graph that would be best utilized by US residents.  Note that all data is presented in US dollars (USD).  Low valuation and high current yield is the primary attraction.

Once again, utilizing a discounted historical normal P/E ratio of only 12.3 would indicate the potential for double digit returns out to fiscal year-end October 2017 in excess of 12% per annum.  High dividend yield and low valuation is the attraction here.

The analyst scorecard on Royal Bank of Canada has been exceptional.  Consequently, I have confidence that future earnings forecasts are reasonable.

For those investors domiciled in Canada, the Royal Bank presents a more consistent historical record of earnings and dividend growth.  The following earnings and price correlated graph illustrates Royal Bank on the Toronto Stock Exchange (TSX) and all data is presented in Canadian dollars (CAD).

Devoid of potential currency exchange headwinds, the Canadian version of Royal Bank is more consistent than what we saw on the New York Stock Exchange version.  Nevertheless, the return potential for both US and Canadian citizens are similar.

S&P Capital IQ only provides analyst scorecard data on one year forward estimates for the TSX listing.  Nevertheless, analysts have been accurate with their forecasts.

Cummins Inc.

Cummings Inc has a moderately cyclical record of earnings growth.  However, its record of dividend growth has been consistent and strong.  The company’s recent earnings and revenue beat seems inconsistent with its recent weak price action.  Consequently, its low P/E ratio and above-average dividend yield appear attractive.

Leading analysts reporting on Cummins appear to be very upbeat about their earnings over the next couple of years.  Consequently, this A+ rated dividend growth stock with a low debt-to-capital ratio and a dividend yield over 3% appears quite attractive in today’s overvalued environment.

However, due to the cyclical nature of this company’s operating history, the analyst scorecard has not been as accurate as we’ve seen with other companies.  Therefore, prospective investors should monitor future earnings reports closely.  On the other hand, current low valuation and dividend yield might mitigate some of that potential risk.


Qualcomm’s current low valuation is somewhat justifiable based on its recent earnings reports.  Nevertheless, the company appears attractively-valued with a dividend yield above 3% and a consistent record of dividend increases since they initiated one in 2002.

If we assume that Qualcomm trades at its historical normal P/E ratio of 18 by fiscal year-end September 2017, the future return potential is extraordinary.  A quick glance at the historical earnings and price correlated graph would indicate that this is not the first time that Qualcomm experienced a moderate earnings drop.

The 1 and 2 year forward analyst scorecard on Qualcomm does indicate some caution.  Nevertheless, low valuation and high dividend yield indicate this candidate as an attractive opportunity.

Archer Daniels Midland Company

The primary attraction motivating me to include Archer Daniels Midland was its fair valuation P/E ratio and prospects for a return to growth next fiscal year.  Additionally, in spite of a moderately cyclical record of earnings, this Dividend Champion has consistently increased its dividend for 40 consecutive years.

In spite of leading analysts expecting a flattening of earnings in fiscal year 2017, Archer Daniels Midland still calculates out to a total annual rate of return in excess of 7%.  The real attraction to this dividend candidate is its long history of dividend increases.

The analysts’ record of forecasting future earnings is positive, but not as consistent as we saw with other companies on the list.  Nevertheless, the real story with Archer Daniels Midland is reasonable valuation and a long record of increasing its dividend.

AFLAC Incorporated

Aflac is a financial that has suffered with low valuation since the Great Recession of 2008.  Additionally, earnings growth has been weak over the past several years.  Nevertheless, Aflac is a Dividend Champion that has consecutively increased its dividend for 32 straight years.

Even when you assume that Aflac will continue to trade at a discounted P/E ratio to the market average, the company still offers the opportunity for average total returns.  However, even in spite of low future earnings growth expectations, if the company were to once again be valued at a market multiple P/E ratio of 15, the annualized total return would exceed 23% per annum.  Consequently, I consider this an attractive long-term opportunity for the patient dividend growth investor.

A strong analyst scorecard contributes to my confidence in analysts’ forecasts on Aflac.  Consequently, I see a low downside potential with a possibility of significant long-term upside.

Summary & Conclusions

In this part 1 of a 2-part series I presented the first 10 of 20 attractively-valued high-quality dividend growth stocks with an average aggregate current yield exceeding 3%.  In part 2, I will present 10 additional fairly valued dividend growth stocks, some of which offer higher dividend yields as I move down the quality chain.  The fairly valued research candidates I will present in part 2 will offer an average aggregate current dividend yield exceeding 4.3%.

Assuming an equal investment in each of the 20 research candidates provides an average aggregate dividend yield of 3.66%.  Although each candidate was primarily suggested based on the merit of fair or attractive valuation, the 10 research candidates in this article was primarily focused on quality.  In part 2, the 10 candidates presented were focused primarily on either yield or total return.

Consequently, the primary objective behind both articles is that there are fairly valued common stock opportunities even in today’s moderately overvalued market.  Admittedly, it is getting very difficult to find attractive valuation at any quality level.  Nevertheless, I believe that the research candidates presented in this series are worthy of consideration for those retired investors primarily focused on income.  However, thanks to fair valuation, I believe this group of 20 dividend growth stocks also offers a reasonable opportunity for capital appreciation.  Given the current high valuation of the S&P 500, I believe this group of stocks also provides the opportunity for market-beating future total returns as well.

Disclosure:  Long JNJ,WMT,CSCO,IBM,PG,RY,CMI,QCOM,ADM,AFL at the time of writing.

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