Though rising yields have dampened the appeal for dividend investing, a niche corner of this space is still in vogue. This is none other than the dividend growth strategy. Stocks with a strong history of dividend growth year over year form a healthy portfolio with greater scope of capital appreciation as opposed to simple dividend paying stocks or those that have high yields.
Why Dividend Growth?
Stocks that have a strong history of dividend growth belong to mature companies, which are less susceptible to large swings in the market, and thus act as a hedge against economic or political uncertainty as well as stock market volatility. At the same time, these offer downside protection with their consistent increase in payouts.
Additionally, these stocks have superior fundamentals that make dividend growth a quality and promising investment for the long term. These include a sustainable business model, a long track of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics. Further, a history of strong dividend growth indicates that dividend increase is likely in the future.
Although these stocks do not necessarily have the highest yields, they have outperformed for a longer period than the broader stock market or any other dividend-paying stock.
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.
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.
P/E Ratio Less than X-Industry: A ratio less than X-industry indicates that the stock is cheap and undervalued in that industry.
Here are five of the 13 stocks that fit the bill:
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 is expected to see earnings growth of 31.46% for this fiscal year and has a P/E ratio of 15.50 versus the industry average of 20.40. Lam Research has a Zacks Rank #1 and 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 a P/E ratio of 14.79 compared with the industry average of 17.74 and an expected earnings growth rate of 3.92% for the year (ending January 2019). It has a Zacks Rank #2 and Growth Score of A.
Texas-based BG Staffing Inc (BGSF - Free Report) is a national provider of temporary staffing services across a diverse set of industries. Its earnings are expected to grow 61.39% this year while its P/E ratio stands at 17.89 compared with the industry average of 18.80. The stock has a Zacks Rank #2 and Growth Score of B.
Michigan-based Penske Automotive Group, Inc. (PAG - Free Report) is a leading acquirer, consolidator and operator of franchised automobile and light truck dealerships and related businesses. The company has a P/E ratio of 9.71 compared with the industry average of 9.85 and its earnings are expected to grow 23.90% this year. It has a Zacks Rank #2 and Growth Score of A.
California-based The Ensign Group Inc. (ENSG - Free Report) provides health care services in the post-acute care continuum and other ancillary businesses in the United States. The company is expected to see earnings growth of 34.06% this year and has a P/E ratio of 21.65 versus the industry average of 35.54. The stock has a Zacks Rank #2 and Growth 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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