Amid market volatility and lower rate environment, investors are seeking consistent and safe income, thereby driving the appeal for dividend investing. This is because investors can enjoy rising current income while anticipating capital appreciation irrespective of market conditions.
While there are several dividend stocks, honing in on those with a history of dividend growth leads to a healthy portfolio, with greater scope of capital appreciation as opposed to simple dividend-paying stocks or those with high yields.
Dividend Growth Strategy
Stocks that have a strong history of dividend growth belong to mature companies, which are less susceptible to large swings in the market, and thus act as a hedge against economic or political uncertainty as well as stock market volatility. At the same time, these offer downside protection with their consistent increase in payouts.
Additionally, these stocks have superior fundamentals that make dividend growth a quality and promising investment for the long term. These include a sustainable business model, a long track of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics. Further, a history of strong dividend growth indicates that dividend increase is likely in the future.
Although these stocks do not necessarily have the highest yields, they have outperformed for a longer period than the broader stock market or any other dividend-paying stock.
As a result, picking dividend growth stocks appear as winning strategies when some other parameters are also included.
5-Year Historical Dividend Growth greater than zero: This selects stocks with a solid dividend growth history.
5-Year Historical Sales Growth greater than zero: This represents stocks with a strong record of growing revenue.
5-Year Historical EPS Growth greater than zero: This represents stocks with a solid earnings growth history.
Next 3–5 Year EPS Growth Rate greater than zero: This represents the rate at which a company’s earnings are expected to grow. Improving earnings should help companies sustain dividend payments.
Price/Cash Flow less than M-Industry: A ratio less than M-industry indicates that the stock is undervalued in that industry and that an investor needs to pay less for better cash flow generated by the company.
52-Week Price Change greater than S&P 500 (Market Weight): This ensures that the stock appreciated more than the S&P 500 over the past one year.
Top Zacks Rank: Stocks having a Zacks Rank #1 (Strong Buy) and 2 (Buy) generally outperform their peers in all types of market environment.
Growth Score of B or better: Our research shows that stocks with a Growth Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Just these few criteria narrowed down the universe from over 7,700 stocks to just 20.
Here are five of the 20 stocks that fit the bill:
Atlanta-based PulteGroup Inc. (PHM - Free Report) is engaged in homebuilding and financial services businesses, primarily in the United States. The company has seen robust earnings estimate revision of $1.21 over the past 7 days for this year. It has an expected earnings growth rate of 22.1%. PulteGroup carries a Zacks Rank #1 and has a Growth Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
New York-based-based Bristol-Myers Squibb Company (BMY - Free Report) is one of the leading global specialty biopharmaceutical companies focused on the development of treatments targeting serious diseases. The company has seen upward earnings estimate revision of 3 cents over the past 30 days for this year and has an estimated earnings growth of 31.6%. It carries a Zacks Rank #2 and has a Growth Score of A.
Nebraska-based Werner Enterprises Inc. (WERN - Free Report) is a transportation and logistics company primarily focused on transporting the truckload shipments such as retail store merchandise, consumer products, grocery products and manufactured product. The company has seen upward earnings estimate revision of couple of cents over the past 30 days for this year and delivered average four-quarter earnings surprise of 4.85%. The stock has a Zacks Rank #2 and Growth Score of A.
Minnesota-based Best Buy Company Inc. (BBY - Free Report) is a multinational specialty retailer of consumer electronics, home office products, entertainment software, communication, food preparation, wellness, heath, security, appliances and related services. The company saw solid earnings estimate revision of 48 cents over the past 7 days for the fiscal year (ending January 2021) and delivered earnings surprise of 21.56% in the past four quarters, on average. The stock has a Zacks Rank #1 and Growth Score of B.
Taiwan-based Taiwan Semiconductor Manufacturing Company Ltd. (TSM - Free Report) is the world's largest dedicated integrated circuit foundry. The company has seen solid earnings estimate revision of 34 cents over the past 30 days for this year and has an estimated earnings growth of 46%. The stock has a Zacks Rank #1 and Growth Score of B.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.