Dividend-paying securities are the major sources of consistent income when returns from the equity market are at risk. While there are several dividend stocks that could provide capital appreciation, zeroing in on stocks having a history of dividend growth year over year 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?
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.
Here are five of the 11 stocks that fit the bill:
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 3.93% for this year and delivered an average positive earnings surprise of 8.73% in the past four quarters. The stock has a Zacks Rank #1 and Growth Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Arizona-based Pinnacle West Capital Corporation (PNW - Free Report) is an investor-owned electric utility holding company. It has an estimated earnings growth rate of 8.1% for this year and delivered an average positive earnings surprise of 6.15% for the past four quarters. The stock has a Zacks Rank #2 and Growth Score of B.
Lowa-based Caseys General Stores Inc. (CASY - Free Report) operates convenience stores under the Casey's and Casey's General Store names. The company has seen positive earnings estimate revision of three cents over the past 30 days for the fiscal year (ending April 2019) and an expected earnings growth rate of 32.55%. It has a Zacks Rank #1 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 saw solid earnings estimate revision of 14 cents over the past 30 days for this year and has an expected earnings growth rate of 14.25%. The stock sports 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 solid earnings estimate of $1.54 over the past 30 days for this year and has an expected earnings growth rate of 20.39%. The stock has a Zacks Rank #1 and Growth Score of A.
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Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.