Dividend-paying securities are the major source of consistent income for investors when returns from the equity market are at risk. Honing in on the growth in this approach leads to a healthy portfolio with a greater scope of capital appreciation as opposed to simple dividend paying stocks or those with high yields.
Why 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, and 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 promising investments for the long term. Further, a history of strong dividend growth indicates that a 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.
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 17 stocks that fit the bill:
California-based Intel (INTC - Free Report) ) is one of the world's largest semiconductor chip maker. The company delivered an average positive earnings surprise of 18.73% over the past four quarters and has an expected earnings growth rate of 30.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Massachusetts-based Thermo Fisher Scientific Inc. (TMO - Free Report) is a provider of analytical instruments, equipment, reagents and consumables, software, and services for research, manufacturing, analysis, discovery, and diagnostics worldwide. It has delivered average earnings surprise of 3.88% in the past four quarters and has an expected growth rate of 16.4%. Thermo Fisher has a Zacks Rank #2 and Growth Score of B.
Wisconsin-based The Marcus Corporation (MCS - Free Report) is engaged in the lodging and entertainment industries. The company has an estimated earnings growth rate of 22.1% for this year and delivered an average positive earnings surprise of 8.73% in the past four quarters. The stock carries a Zacks Rank #1 and has a Growth Score of B.
Indiana-based Anthem Inc. (ANTM - Free Report) operates as a health benefits company in the United States. The company saw positive earnings estimate of four cents over the past 30 days for this year with an expected earnings growth rate of 30.1% for this year. The stock has a Zacks Rank #2 and Growth Score of B.
Arkansas-based ArcBest Corporation (ARCB - Free Report) provides freight transportation services and integrated logistics solutions worldwide. The stock saw solid earnings estimate revision of 49 cents in a month for the current year and is expected to see earnings growth of 186.5% this year. ArcBest has a Zacks Rank #1 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.