The difference being 77 basis points or about 33%, which suggests it could be undervalued. An example below is Texas Instruments Inc ( TXN) - the current yield is 3.13% while its five-year average is just 2.36%.

This idea suggests a company's yield will revert to the norm over time. I use the dividend yield theory to determine if a stock is potentially overvalued or undervalued. The company should have room to grow their dividend too, so a payout ratio of 50% or less is used as the final filter. In this case, a company needs to have a 10-year dividend growth rate of 10% or greater to ensure growth in the dividend itself, in addition to being a quality company.

Next, since this is a dividend growth watchlist, it would logically make sense to measure a company's dividend growth. An S&P Capital IQ Earnings and Dividend Ranking of A or A+ helps to establish the company has achieved and should continue to achieve lower price volatility when compared to the broader market. This ensures a company I consider for investment has a sustainable competitive advantage for the foreseeable future. The company must also have a 'Wide' economic moat, according to Morningstar. The companies listed on this watchlist are stable with a track record of raising their dividends consistently.

SusanWoodImages Dividend Growth Watchlist Criteria

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