3 Dividend Growth Stocks to Buy From a Top-Rated Fund Manager

Susan Dziubinski: Hi I’m Susan Dziubinski with Morningstar. Vanguard Dividend Growth VDIGX is one of the most popular and best dividend stock funds around; in fact, the fund earns a Morningstar Medalist Rating of Gold, which is our top rating. Manager Donald Kilbride and his team maintain a relatively compact portfolio of 40 or 50 dividend growth stocks. They focus on companies with strong balance sheets, above-average returns on capital, and other competitive advantages whose stocks are trading at reasonable prices. The team favors companies that can grow their dividends at a rate of inflation plus 3%. The portfolio is largely made up of blue-chip stocks with sizable competitive advantages.

Today we’re taking a dive into Vanguard Dividend Growth’s portfolio, focusing on three of its top holdings that look undervalued according to Morningstar’s metrics.

3 Dividend Growth Stocks to Buy from a Top-Rated Fund Manager

1. Honeywell International HON
2. Nike NKE
3. Ecolab ECL

The first undervalued stock from Vanguard Dividend Growth’s latest portfolio is Honeywell International HON. At Morningstar, we think Honeywell is one of the strongest multi-industry firms in operation today. The company operates four business segments, which are aerospace, building technologies, performance materials and technologies, and safety and productivity solutions. We think the company has carved out significant competitive advantages due to its high switching costs and its ability to leverage its software technology across its massive industrial installed base. We therefore assign the company a wide economic moat rating. Over the next five years, we think Honeywell is capable of mid-single-digit top-line growth, 9% to 10% adjusted earnings per share growth, and free cash flow margins in the midteens. We think shares are worth $228 apiece.

The next undervalued stock from Vanguard Dividend Growth’s portfolio is Nike NKE. Nike stock is having a tough year, as inflation, elevated inventory, and uncertain demand muddy the company’s short-term outlook. But at Morningstar, we view Nike as the leader in the athletic apparel market and we believe it will overcome these short-term challenges. We expect that the company will maintain premium pricing and generate economic profits for decades, and we assign the firm a wide economic moat rating. We forecast compound average sales growth for Nike of 6.5% over the next 10 years. We think shares are worth $136 each.

And the last undervalued stock from Vanguard Dividend Growth’s portfolio that we’ll talk about today is Ecolab ECL. Ecolab is the global leader in the cleaning and sanitation industry, providing products that help its hospitality, food service, and healthcare customers do laundry, wash dishes, and maintain regulatory compliance. Morningstar assigns Ecolab a wide economic moat rating thanks to its scale. The company’s water treatment business in particular stands to benefit from a secular trend toward water conservation from the use of water management systems. We expect total revenue to grow at a mid-single-digit annual average rate over the next 10 years. We think shares are worth $210.

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Morningstar strategist Seth Goldstein, senior analysts Josh Aguilar and David Swartz, and analyst Paul Ruppe provided the research behind this segment.

Watch “3 Cheap Value Stocks to Buy” for more from Susan Dziubinski.