Amid low rates and super-easy Fed policies, dividend investing has been gaining immense popularity. Though the strategy doesn’t offer dramatic price appreciation, it is a major source of consistent income for investors in any type of market.
While there are several dividend stocks, investors should zero in on companies that not only offer dividends but also consistently increase their payouts. This is because stocks that have a strong history of dividend growth as opposed to those that offer high yields form a healthy portfolio with more scope for capital appreciation.
Peeping Into the 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.
Furthermore, these have a long history of outperformance than the broader stock market or any other dividend-paying stock over the long term. However, it does not necessarily mean that they have the highest yields.
As a result, picking stocks that offer dividend growth appears as a winning strategy 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 year.
Top Zacks Rank: Stocks having a Zacks Rank #1 (Strong Buy) and 2 (Buy) generally outperform their peers in all types of market environments.
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 17.
Here are five of the 17 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 an expected earnings growth rate of 22.1% for this year and delivered an average earnings surprise of 14.49% over the past four quarters. 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.
Florida-based Superior Uniform Group Inc. (SGC - Free Report) manufactures and sells apparel and accessories in the United States and internationally. It has delivered an average four-quarter earnings surprise of 102.79% and has an expected earnings growth rate of 130.4%. The stock has a Zacks Rank #1 and Growth Score of B.
California-based Activision Blizzard Inc. (ATVI - Free Report) is a leading developer and publisher of console, online and mobile games. The stock saw positive earnings estimate revision of 3 cents over the past 30 days for this year and has estimated earnings growth of 42.2%. It has a Zacks Rank #2 and Growth Score of B.
Nebraska-based Werner Enterprises Inc. (WERN - Free Report) is a transportation and logistics company primarily focused on transporting truckload shipments such as retail store merchandise, consumer products, grocery products and manufactured products. The company has seen upward earnings estimate revision of 13 cents over the past 30 days for this year and delivered a four-quarter earnings surprise of 18.99%, on average. The stock has a Zacks Rank #2 and Growth Score of A.
Minnesota-based Target Corporation (TGT - Free Report) operates large-format general merchandise and food discount stores in the United States, including Target and SuperTarget. The stock has seen positive earnings estimate revision of $2.00 over the past 30 days for the fiscal year (ending January 2021) and has estimated earnings growth of 11.89%. The stock has a Zacks Rank #1 and Growth Score of A.
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Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.