The stock market is marching higher, hitting multiple fresh highs amid Washington turmoil, geopolitical risks and lofty valuation. In such a scenario, dividend investing seems a perfect choice. These cash payouts are major sources of consistent income for investors when returns from the equity market are at risk.
In particular, stocks that have a strong history of dividend growth as opposed to those that pay high yields form a healthy portfolio with more scope for capital appreciation.
Why Dividend Growth Investing Is Better?
Dividend growth stocks offer the best of both worlds –– potential for capital appreciation and rising income even in a volatile market. This is because these stocks belong to mature companies, which are less susceptible to large swings in the market, while simultaneously offer outsized payouts or sizable yields on a regular basis irrespective of the market direction.
Dividend growth reflects a sustainable business model, a long track of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics. All these superior fundamentals make dividend growth stocks quality and promising investments for the long term. Further, a history of strong dividend growth indicates that hike is likely in the future.
Though these stocks have a long history of outperformance compared with the broader stock market or any other dividend paying stock, it does not necessarily mean that they have the highest yields.
As a result, picking dividend growth stocks appear as winning strategies 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 one year.
Top Zacks Rank: 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 six of the 24 stocks that fit the bill:
Delta Air Lines Inc. (DAL - Free Report) : This Georgia-based company is America's fastest growing international carrier that provides scheduled air transportation for passengers and cargo in the United States and internationally. The company has seen solid earnings estimate revision of 38 cents over the past 90 days for this year and has an expected earnings growth rate of 3.26%. It has a VGM Style Score of A and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Cummins Inc. (CMI - Free Report) : This Indiana-based company is one of the leading worldwide designers and manufacturers of diesel engines. It has seen solid earnings estimate revision of $1.24 for this year over the past three months, and delivered an average positive earnings surprise of 14.52% for the past four quarters. It has a Zacks Rank #2 and a VGM Style Score of B.
Aetna Inc. (AET - Free Report) : Based in Connecticut, this is one of the nation's largest health benefits companies and insurance and financial services organizations. The stock has seen positive earnings estimate revision of 16 cents over the past 90 days for this year with an expected earnings growth rate of 9.28%. The stock has a Zacks Rank #2 and a VGM Style Score of A.
H&R Block Inc. (HRB - Free Report) : This Missouri-based H&R Block is a diversified company involved in tax return preparation, electronic filing of income tax returns and other tax-related services. The company has seen strong earnings estimate revision of 21 cents over the past 90 days for this fiscal year and delivered an average positive earnings surprise of 8.95% for the last four quarters. It has a Zacks Rank #1 and a VGM Style Score of A.
MKS Instruments Inc. (MKSI - Free Report) : This Massachusetts-based company is a leading worldwide developer, manufacturer and supplier of instruments, components and subsystems used to measure, control and analyze gases in semiconductor manufacturing and similar industrial manufacturing processes. The company has seen strong earnings estimate revision of 41 cents over the past 90 days for this year and has an expected earnings growth rate of 77.06%. It has a Zacks Rank #1 and a VGM Style Score of B.
Torchmark Corporation (TMK - Free Report) : This Texas-based financial services holding company specializes in life and supplemental health insurance for middle-income Americans. It has seen positive earnings estimate revision of a nickel for this year over the past three months, with an expected earnings growth rate of 4.13%. The stock has a Zacks Rank #2 with 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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