In its April 2015 “World Economic Outlook,” the International Monetary Fund termed U.S. economic growth as “energetic.” Strong consumer spending during the holiday season was buoyed by a windfall from low crude oil prices and an improving labor market.
In recent months, fresher economic indicators have shown retail activity picking up, as well as healthy gains in payrolls and new-home sales. As the U.S. economy is improving, the most important stock market indices are also gaining pace. The Nasdaq is up 275% since the markets bottomed in Mar 2009 and the New York Stock Exchange climbed 165% higher. Meanwhile, the S&P 500 has gained over 210% over the same time frame.
Though the economy shrank at an annual rate of 0.2% in the first quarter of 2015, growth through the rest of the year is expected to be much healthier. However, it remains to be seen whether some of the headwinds that hurt growth in the first quarter — like the stronger dollar — persist through the remainder of the year.
While the trade picture may remain cloudy as exporters feel the pinch from the strong dollar, we believe that the steady pace of gains in the labor market should bolster the overall economy.
The Winning Strategy
In the face of such odds, investors should be very careful about their investing strategy.
With the U.S. economy is picking up steam, employing a momentum strategy could be profitable. Momentum stocks typically outperform when the stock market is rising and underperform when it is falling.
While momentum investing works well in a volatile market, most investors look for some sort of protection to guard their portfolio against a possible stock market correction or downfall.
For such investors, we feel that the smartest play is to venture into dividend stocks. Not only do these stocks offer higher income in the current low-rate environment but also provide a cushion against equity market risks.
Moreover, dividend stocks are historically less volatile and are proven outperformers over the long term. These stocks are a safe bet as dividends generally act as a hedge against economic uncertainty.
Thus, a combination of momentum and dividend features could be rewarding while selecting stocks now.
3 Stock Picks
With the help of the Zacks Rank and our style score system we have zeroed-in on 3 stocks that provide generous dividends and possess upside potential.
Each of the stocks below provides a dividend yield of above 2.5% and also carries a Momentum Style Score of ‘A.’ A favorable momentum style score indicates the suitable timing to enter a stock. Back-tested results show that stocks with Style Scores of ‘A’ or ‘B,’ when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) handily outperform other stocks.
Flaunting a solid Zacks Rank and Momentum Style Score of ‘A,’ coupled with an average price change of above 5% over the last four weeks, the following stocks are good bets for now.
Darden Restaurants, Inc. (DRI - Free Report)
Darden Restaurants, through its subsidiaries, owns and operates casual dining restaurants in the U.S. and Canada. The company is part of the retail-restaurants industry which is currently in the top 13% of our 260-plus industries.
Darden has been paying dividends since 1995, and has been increasing its dividend annually since 2005. Currently offering a dividend yield of 3.11%, this Zacks Rank #2 stock has gained nearly 11% over the last four weeks.
Not only does the stock have an impressive short-term momentum, it is seeing solid activity on the earnings estimate revision front as well. In fact, over the past month, current quarter estimates have risen from 54 cents per share to 55 cents, while current year estimates have climbed from $2.83 per share to $3.13.
Fulton Financial Corp. (FULT - Free Report)
Fulton Financial is a bank holding company providing retail and commercial banking and investment management and trust services in central and eastern Pennsylvania, southern New Jersey, northern Maryland and southern Delaware.
It is a player in the Banks-Northeast space, which is currently in the top 28% of our 260-plus industries. This Zacks Rank #2 stock has rallied nearly 6% over the last four weeks and can be an intriguing choice for momentum investors right now.
Moreover, in Mar 2015, the company announced a 12.5% hike in its dividend to 9 cents per share, reaching its current dividend yield to 2.69%.
Nordic American Tankers Limited (NAT - Free Report)
Nordic American Tankers is engaged in acquiring, disposing, owning, leasing and chartering three double hull Suezmax oil tankers. The company has a growth focus to reach 24 from 3 Suezmax crude oil tankers in less than eight years. The company belongs to the Transportation-Shipping industry, which is currently in the top 30% of our 260-plus industries.
The company has a unique business model with high dividend payouts and low financial risk. Notably, the stock has a current dividend yield of 10.38%. Moreover, this Zacks Rank #1 stock has added nearly 13% over the past one month, reflecting healthy short-term momentum.
The company is seeing solid activity on the earnings estimate revision front as well. In fact, over the past month, current quarter estimates have risen from 20 cents per share to 21 cents, while current year estimates have risen from 92 cents per share to 97 cents.