This article presents the highest-quality Dividend Challengers, which are companies listed on U.S. exchanges that have consistently higher annual dividend payouts for at least 5-9 years. Companion articles presented the highest-quality Dividend Champions (25+ years) and Dividend Contenders (10-24 years).

I use a quality scoring system that employs six quality indicators from trusted and independent sources. Each quality indicator contributes up to 5 points to a stock's quality score, for a maximum of 30 points.

I distinguish between the following ratings depending on a stock's quality score:

Generally, I invest in stocks rated Exceptional, Excellent, and Fine. In rare cases, such as with high-yielding defensive stocks, I'll consider investing in stocks rated Decent.

Stocks with quality scores in the range of 16-30 are Investment Grade, while stocks with quality scores below 16 are Speculative Grade.

To screen for the highest quality Dividend Challengers, I screened for stocks with quality scores in the range of 21-30, so those rated Exceptional, Excellent, and Fine.

The Dividend Challengers

The late David Fish created the so-called CCC list of DG stocks with dividend increase streaks of at least 25 years (Dividend Champions), 10-24 years (Dividend Contenders), and 5-9 years (Dividend Challengers).

We introduced Dividend Radar in May 2020 as a free resource for DG investors. Dividend Radar is automatically created and published every Friday as an Excel spreadsheet. It includes key metrics and fundamental data of interest to dividend growth investors, as well as up-to-date dividend growth rates, fair value estimates, and trailing total returns for all DG stocks.

The latest Dividend Radar (dated August 25, 2023) contains 724 DG stocks. There are 135 Dividend Champions, 374 Dividend Contenders, and 215 Dividend Challengers.

The 215 Dividend Challengers have an average dividend increase streak of 6.9 years, an average dividend yield of 3.31%, and an average 5-year dividend growth rate [DGR] of 16.55%. The average 5-year DGR of the Dividend Challengers is significantly higher than those of the Dividend Champions (6.67%) and Dividend Contenders (10.18%).

Below is a chart showing the sector distribution of the Dividend Challengers:

The Dividend Challengers are dominated by stocks from the Financials sector (38.1%).

I find it useful also to consider the supersector distribution of the Dividend Challengers:

About six out of every ten Dividend Challengers are cyclical stocks.

Quality Assessment

In April 2019, David Van Knapp [DVK] presented an elegant and effective system to assess the quality of DG stocks. I adopted and later modified DVK's system to use six quality indicators worth 5 points each for a maximum quality score of 30 points.

To screen for the highest quality Dividend Challengers, I screened for stocks with quality scores in the range of 21-30. Only 20 of 215 Dividend Challengers (9.3%) pass the screen.

The top-scoring Dividend Challenger earned 26 points and is the only stock rated Excellent in the list. The remaining 19 stocks are rated Fine. There are no stocks rated Exceptional in the list.

I own only one of these stocks in my DivGro portfolio, so there are 19 other high-quality Dividend Challengers I could consider for possible inclusion in my portfolio.

Valuation and Buy-Below Price

To estimate fair value, I reference fair value estimates and price targets from several sources, including Portfolio Insight, Morningstar, and Finbox. Additionally, I estimate fair value using the 5-year average dividend yield of each stock. With several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.

Recognizing that the highest-quality DG stocks rarely trade at discounted valuations, I'm willing to pay a premium price for such stocks. On the other hand, I require a discount for lower-quality DG stocks. The price I'm willing to pay is anything up to my risk-adjusted Buy Below price:

Additional Criteria

Stocks that pass my quality and valuation screens are candidates for investment.

For candidates I don't own, I consider these additional criteria:

• Growth Outlook: a qualifying Adjusted Chowder Number [ACN], meaning the stock is likely to deliver annualized returns of at least 8%
• Income Outlook: a 5-year yield on cost [YOC] ≥ 4.00%, meaning the stock is likely to have a high YOC after five years of ownership
• Dividend Quality: A+ or A Dividend Quality Grades

For candidates already in my portfolio, I favor adding to underweight positions, as determined by my system for calculating portfolio target weights.

The Highest-Quality Dividend Challengers

This section presents the 20 highest-quality Dividend Challengers ranked by quality score. To rank stocks, I sort them in descending order by quality score and use tie-breaking metrics, including their Dividend Safety Scores, S&P Global Credit Ratings, and forward dividend yield.

The table presents key metrics of interest to dividend growth investors, along with quality indicators and my fair value estimates:

None of these stocks pass my Growth Outlook, Income Outlook, and Dividend Quality screens, so I'm not interested in adding anything to my DivGro portfolio at this time.

As for the only stock I already own, TD, my position is underweight by 56 shares. TD is trading well below my risk-adjusted Buy Below price of $72, so I'll consider adding more shares to make TD a full-sized position.

TRP, TD, and MTB have the highest forward yields and are suitable for income-focused investors. All three stocks trade well below my risk-adjusted Buy Below prices.

For growth-oriented investors, the best choices are FMC, SONY, and DG. Again, all three stocks trade well below my risk-adjusted Buy Below prices.

Based on their discounts, DG and FMC are most appropriate for value-driven investors, while TMO is the best choice for total-return investors based on past performance.

Dividend Challengers: Additional Screens

In this section, I present the top Dividend Challengers based on various metrics. This is simply a sorted version of some of the high-quality Dividend Challengers presented earlier, as these are the only ones with quality scores in the range of 21-30.

Adjusted Chowder Number

As mentioned earlier, I like using the ACN as a Growth Outlook screen. Stocks with ACNs colored green in my summary tables are likely to deliver annualized returns of at least 8%, provided they continue to increase their dividends at similar rates.

Here are the top Dividend Challengers based on ACN:

FMC is the best candidate based on its ACN of 19 and a discount to my risk-adjusted Buy Below price of 26%. The stock passes my Growth Outlook and Income Outlook screens but not my Dividend Quality screen.

Dividend Yield

Below are the top seven Dividend Challengers based on forward yield:

These selections yield at least 2.58%, and all are discounted to my risk-adjusted Buy Below prices.

TRP, TD, MTB, and FMC pass my Growth Outlook and Income Outlook screens, but none of them pass my Dividend Quality screen.

Dividend Growth Rate

Here are the top seven Dividend Contenders based on 5-year DGRs:

These selections have 5-year DGRs of 15.2% or higher.

Only FMC passes both my Income Outlook and Growth Outlook screens, but it doesn't pass my Dividend Quality screen.

Trailing Total Returns

Below are the top seven stocks sorted by 5-year trailing total returns:

None of these stocks pass both my Growth Outlook and Income Outlook screens, and only MLM passes my Dividend Quality screen.

Given their past performance (5-year TTRs of at least 16.6%), it is unsurprising that most of these selections are not discounted right now.

As mentioned earlier, the best pick for total return investors would be TMO.

Concluding Remarks

This article presented the 20 highest-quality Dividend Challengers based on my quality scoring system. Additionally, I used several screens to sort these stocks by various metrics.

I've highlighted several stocks trading at favorable valuations and offering compelling metrics:

Based on their discounts, DG and FMC are most appropriate for value-driven investors, while TMO is the best choice for total-return investors based on past performance.

For income investors: TRP, TD, and MTB (yields > 4.09%)

For growth-oriented investors: FMC, SONY, and DG (5-DGR > 15.9%)

For value investors: DG and FMC (discounted by 25% or more)

For total return investors: TMO

As always, I encourage readers to do their own due diligence before investing.

Thanks for reading, and happy investing!

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.