While investors avoid stocks that do not have juicy yields, it is true that low-yield stocks have a solid history of dividend growth that lead to outperformance.
Dividend Growth: A Winning Strategy
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.
Stocks that have a strong history of dividend growth have superior fundamentals, reflecting a sustainable business model, a long track of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics. All these add quality to dividend growth stocks and make them promising investments for the long term. Further, a history of strong dividend growth indicates that a hike is likely in the future.
Furthermore, these have a long history of outperformance over the long term. When compared with the ones that pay out high yields, dividend growth stocks form a healthy portfolio, with more scope for capital appreciation. However, 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 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.
Growth Score of B or better: Our research shows that stocks with a Growth Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are five of the 21 stocks that fit the bill:
California-based Intel (INTC - Free Report) is one of the world's largest semiconductor chip maker. The company has seen strong earnings estimate revision of 14 cents over the past 30 days for this year and delivered an average positive earnings surprise of 19.86% over the past four quarters. The stock has a Zacks Rank #1 and a Growth Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ohio-based The Kroger Co. (KR - Free Report) is one of the world's largest food retailers. It also manufactures and processes food products for sale in its supermarkets. The company has seen solid earnings estimate revision of five cents for this fiscal year (ending January 2019) over the past two months, with an expected earnings growth rate of 3.92%. It has a Zacks Rank #2 and Growth Score of A.
Ohio-based The Progressive Corporation (PGR - Free Report) provides personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services primarily in the United States. The company has seen positive earnings estimate revision of 25 cents over the past 30 days for this year and has an expected earnings growth rate of 66.92%. It sports a Zacks Rank #1 and a Growth Score of A.
Indiana-based Anthem Inc. (ANTM - Free Report) operates as a health benefits company in the United States. The stock has seen positive earnings estimate revision of nine cents over the past 30 days for this year, with an expected earnings growth rate of 28.59%. The stock has a Zacks Rank #2 and a Growth Score of BA.
Hawaii-based Matson Inc. (MATX - Free Report) operates as an ocean transportation and logistics company. It offers shipping services in Hawaii, Guam, and Micronesia islands and expedited service from China to southern California. The stock has seen positive earnings estimate revision of three cents over the past 30 days for this year and has an expected earnings growth rate of 25.84%. It has a Zacks Rank #2 and Growth 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: https://www.zacks.com/performance.
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