Dividend is a major source of consistent income for investors when returns from the equity market are at risk.
Dividend paying stocks are primarily mature companies, which are less susceptible to large swings in the market. Their market leading position, large customer base, sustainable business model, long track of profitability and strong liquidity allow them to 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.
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 a long history of outperformance compared with 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 2: Stocks having a Zacks Rank #1 (Strong Buy) and 2 (Buy) generally outperform their peers in all types of market environment. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 13 stocks that fit the bill:
Owens Corning Inc. (OC - Free Report) : This Toledo, TX-based company develops, manufactures and markets insulation, roofing and fiberglass composites. The stock has a VGM Style Score of B and a Zacks Rank #1. The stock delivered an average positive earnings surprise of 20.17% in the past four quarters. The Zacks Consensus Estimate for earnings remained steady at $4.28 over the last 30 days.
Lam Research Corporation (LRCX - Free Report) : This California-based company designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. The stock has a Zacks Rank #1 and a VGM Style Score of A. The Zacks Consensus Estimate remained steady at $12.61 over the last 30 days.
Juniper Networks Inc. (JNPR - Free Report) : This California-based company is a provider of Internet infrastructure solutions that enable Internet service providers and other telecommunications service providers to meet demand resulting from the rapid growth of the internet. It has a VGM Style Score of B and carries a Zacks Rank #2. The stock delivered an average positive earnings surprise of 7.85% over the trailing four quarters.
GATX Corporation (GATX - Free Report) : This Illinois-based company is the leading global railcar lessor specializing in railcar and locomotive operating leasing, aircraft operating leasing, information technology leasing, and venture finance for customers in diverse industrial sectors worldwide. The company has a Zacks Rank #2 and a VGM Style Score of B. The Zacks Consensus Estimate remained unchanged at $4.62 over the last 30 days.
Microchip Technology Inc. (MCHP - Free Report) develops and manufactures specialized semiconductor products for a wide variety of embedded control applications. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 10.16%. It has a VGM Score of B. The Zacks Consensus Estimate for earnings has rose 34 cents to $5.26 over the last 30 days.
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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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