An investment strategy based on dividend growth seems to be one of the best options in the current market environment, which is ruffled by the presidential election, the OPEC deal talks, and the possible rate hike by the Fed in December. This is because investors can enjoy rising current income while awaiting capital appreciation irrespective of market conditions.
Significance of Dividend Growth
Stocks that have a strong history of dividend growth act as a hedge against any market downturn and economic or political turmoil because these belong to mature companies, which are less susceptible to large swings in the market.
These stocks have superior fundamentals as opposed to their traditional dividend counterparts such as a sustainable business model, a long track record of profitability, rising cash flows, good liquidity, strong balance sheet and some value characteristics. They have a history of outperformance over the long term but not necessarily high dividend yields. All these makes dividend growth a quality and promising investment metric for the long term.
Further, a history of strong dividend growth indicates that a future dividend increase is likely. This makes the portfolio healthy and safe.
Here are the screening parameters that could result in a winning dividend growth portfolio:
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 selects stocks with a strong record of revenue growth.
5-Year Historical EPS Growth greater than zero: This shortlists 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 a better cash flow generated by the company.
52-Week Price Change greater than S&P 500 (Median): This ensures that the stock appreciated more than the S&P 500 over the past one year.
Zacks Rank less than or equal to 2: Stocks having a Zacks Rank #1 (Strong Buy) and 2 (Buy) generally outperform their peers in any type of market environment.
VGM Style Score of B or better: This is simply a weighted combination of Value, Growth and Momentum. This when combined with a Zacks Rank #1 or #2 offers the best upside potential.
Market Capitalization greater than $2 billion: We have eliminated small cap stocks to ensure better flexibility and tradability.
Here are five of the 10 stocks that fit the bill:
Packaging Corporation of America (PKG - Free Report) : This Illinois-based company is one of the largest producers of containerboard in the United States and also one of the largest manufacturers of corrugated packaging products. The stock saw earnings estimate revision of a couple of cents over the past 30 days for this year and is expected to grow at an above-average growth rate of 6.93%. It has a Zacks Rank #2 and a VGM Style Score of B.
Gentex Corp. (GNTX - Free Report) : This Michigan-based company is a provider of high-quality products to the worldwide automotive industry and North American fire protection market. It has delivered an average positive earnings surprise of 3.64% over the past four quarters and has an above-industry earnings growth rate of 10.88% for this year. Gentex has a Zacks Rank #2 and a VGM Style Score of B.
Tyson Foods Inc. (TSN - Free Report) : This Arkansas-based company is one of the world’s largest producers of chicken, beef, pork and prepared foods, offering a wide range of protein-based and prepared food products. It saw positive earnings estimate revisions of eight cents for fiscal 2016 over the past 30 days, with an expected above-average growth rate of 46.03%. The stock has a VGM Style Score of A and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
Dick's Sporting Goods Inc. (DKS - Free Report) : This Pennsylvania-based company is a leading full-line sporting goods retailer in the United States. The stock saw positive earnings estimate revision of a penny over the past 30 days for this fiscal year and delivered earnings surprises in two of the past four quarters with an average beat ratio of 4.68%. The stock has a Zacks Rank #1 and a VGM Style Score of A.
Unum Group (UNM - Free Report) : This Tennessee-based company is the industry leader in disability income protection and one of the top providers of supplemental benefits in the nation. It has delivered a positive earnings surprise of 3.54% over the past four quarters and its earnings are expected to growth at rate of 5.89% for this year. The company has a Zacks Rank #2 and a VGM Style 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: http://www.zacks.com/performance
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