Given a dovish Fed and market uncertainty, investors are in search of steady income with some aspect of growth. In such circumstances, growth-focused dividend stocks make compelling plays as these stocks not only pay dividends but also consistently increase their payout.
Why Growth-Focused Dividends?
Stocks with a strong history of dividend growth ensure steady returns and act as a hedge against any market downturn and economic or political turmoil. These stocks belong to mature companies, which are less susceptible to large swings in the market. Simultaneously, these offer outsized payouts or sizable yields on a regular basis irrespective of the market direction. As a result, these stocks provide greater stability and more scope for capital appreciation as opposed to those that pay high yields.
Additionally, these companies have a sustainable business model, a long track of profitability, rising cash flows, good liquidity, strong balance sheet and some value characteristics. All these superior fundamentals make dividend growth stocks a quality and promising investment for the long term. Further, a history of strong dividend growth indicates that a future hike is likely. This makes the portfolio healthy and safe.
Though these stocks have long history of outperformance compared to the broad stock market or any other dividend paying stocks, it does not necessarily mean that they have the highest yields.
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 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 a 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.
Zacks Rank Less than 3: Stocks having a Zacks Rank #1 (Strong Buy) and 2 (Buy) generally outperform their peers in all types 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.
Here are five of the 25 stocks that fit the bill:
Huntington Ingalls Industries Inc. HII: This Virginia-based company is engaged in designing, building, overhauling, and repairing ships primarily for the U.S. Navy and the U.S. Coast Guard. The stock saw solid earnings estimate revision by 88 cents over the past 90 days for this year, with an expected earnings growth rate of 11.13%. It has a Zacks Rank #1 (Strong Buy) and a VGM Style Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Activision Blizzard Inc. ATVI: This California-based company is a worldwide pure-play online and console game publisher with leading market positions across all categories of the rapidly growing interactive entertainment software industry. The stock saw positive earnings estimate revision of 7 cents over the past 90 days for this year and delivered a positive average earnings surprise of 33.88% over the past four quarters. It has a Zacks Rank #2 and a VGM Style Score of B.
Big 5 Sporting Goods Corporation : This California-based company is a leading sporting goods retailer in the western United States, operating stores under the name Big 5 Sporting Goods. The stock saw positive earnings estimate revision of 16 cents over the past 90 days for this year with an expected earnings growth rate of 35.06%. The stock has a Zacks Rank #1 and a VGM Style Score of A.
Tallgrass Energy Partners LP TEP): This Kansas-based company owns, operates, acquires and develops midstream energy assets primarily in North America. It saw a significant positive earnings estimate revision of $1.03 for this year over the past 90 days, and has an expected growth rate of 47.64%. Tallgrass has a Zacks Rank #2 with a VGM Style Score of B.
Lazard Ltd. LAZ: This Bermuda-based company is a preeminent international financial advisory and asset management firm that has long specialized in crafting solutions to the complex financial and strategic challenges of their clients. The stock saw solid earnings estimate revision of 14 cents over the past 90 days for this year and has an expected earnings growth rate of 3.96%. It has a Zacks Rank #2 and a VGM Style Score of A.
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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.
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