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3 Growth Stocks With Attractive Dividends to Ride Out Inflation

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Even though the news of economic recovery amid easing of restrictions, increasing pent-up demand and improving employment levels is enough to cheer investors, the same is stoking inflation.

Per the recent inflation data, Labor Department’s consumer price index (CPI) jumped 5.4% year over year. This was the fastest 12-month rise in more than a decade. The core CPI that excludes volatile categories including food and energy also remains elevated.

This general increase in price level is driven by a massive surge in prices of used cars and trucks, an uptick in airfares as well as the rise in prices of hotels and restaurants.

The Fed is considering this spike in inflation a blip, which will level off gradually. Thus, the government is setting aside all inflationary fears for the moment and are continuing with their monetary policy to support economic growth.

High inflationary environment is generally not conducive for growth stocks as interest rates tend to shoot up, hurting corporate profits. But this time, there is full assurance from the administration that interest rates will not be raised in the near future.

This reassurance raised optimism among investors and made growth stocks look alluring with healthy dividend yields that promise to protect their inflation-adjusted returns.

We thus shortlisted some stocks with a solid Growth Score. The Zacks Growth Style Score (part of the Zacks Style Scores system), looks beyond the traditional growth attributes to analyze a company's real growth prospects, makes it pretty easy to find cutting-edge growth stocks.

These stocks also have a consistent history of dividend hikes, which should continue in the foreseeable future.

Our Choices

Home Depot, Inc. (HD - Free Report) , the world’s largest home-improvement specialty retailer, is in a sweet spot owing to continued strong demand for home-improvement projects as well as the ongoing investments in the space.

The company is also reaping significant benefits from the execution of the “One Home Depot” investment plan.  It  focuses on expanding supply-chain facilities, augmenting technology investments and enhancing the digital experience.

Its efficient delivery network goes well with its customers. Its recently-launched interconnected facilities like the mixed-cart selling from store capability and in-the-tool rental facilities are likely to enrich the experience of both Pro (professional) and DIY (Do-It-Yourself) customer categories.

A favorable housing market, aided by accelerated home-buying activities, has been driving demand for home-improvement goods for a while now. Home Depot is a key beneficiary of this trend as the leading retailer in the home-improvement space.

The stock carries a Growth Score of A  and a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

It has a dividend yield of 2.07% and has upped the same for the past decade with payout ratio between 40% and 50%. With an annual free cash flow return on investment of 49.04%, ahead of the industry’s nearly 45.33%; the dividend payment is likely to be sustainable. 

ExxonMobil Corp. (XOM - Free Report) boasts a bellwether status in the energy space and an optimal integrated capital structure that has historically produced industry-leading returns. Management's track record of capex discipline across the commodity price cycle makes it a relatively lower-risk energy sector player.

The company made multiple world-class oil discoveries at the Stabroek Block, located off the coast of Guyana. It hit another oil prospect at the Longtail-3 well, offshore Guyana.  These new finds will lead to soaring production volumes. Daily production is expected to reach 1 million barrels by 2027. Annually, through 2025, the company is willing to invest in the $20-$25 billion range. The investments will likely get allocated to profitable growth projects that will generate significant cash flow. The company expects to generate more than 30% returns from such investments.

Its strong growth profile along with low debt compared to other integrated majors makes it all the more attractive. These factors should enable Exxon to grow its cash flow, allowing it to continue increasing its dividend. Last year, the company did not raise its dividend as its business took a hit from a decline in demand for energy. This can be taken as a one-time event since the company has been hiking dividend for 18 straight years. Now management deepens focus to add shareholder value.

The stock currently carries a Zacks Rank #3 (Hold) and a Growth Score A.

Discover Financial Services (DFS - Free Report) is a payment processor and also loans money through its own bank. The company generates revenues from the interest on its credit card balances, which is the interest income part. Its non-interest income is generated from its card-processing business.

In 2020, the company suffered lower interest rates and depressed net interest margin due to weak lower card balances as defaults and credit losses were rampant. Revenues were down 7.4% in 2020. Its peer American Express Co. (AXP - Free Report) also suffered last year but is recovering solidly this year.

As the economy reopens, consumer spending and prudent expansion of credit should drive profitable loan growth going forward. Several factors, such as bolstered sales volume, improving trends in categories of retail and restaurants plus a rise in credit standards should support loan growth, which in turn, will boost net interest margin.

What more, Discover Financial Services has increased its annual dividend since 2011.  It comfortably generates the required cash flow to continue paying and growing its dividend.

The Zacks Consensus Estimate for 2021 revenues is pegged at a skyrocketing growth rate of 272.2%.

The stock presently carries a Zacks Rank of 3 and a Growth Score A.