Honing in on dividend is a tried-and-true practice during market turbulence. These cash payouts are major sources of consistent income for investors when returns from the equity market are at risk. Investors can enjoy rising current income, while anticipating capital appreciation irrespective of market conditions.
In particular, stocks that have a strong history of dividend growth as opposed to those that offer high yields form a healthy portfolio with more scope for capital appreciation.
Why is Dividend Growth Better?
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 23 stocks that fit the bill:
Georgia-based Delta Air Lines Inc. (DAL - Free Report) is America's fastest growing international carrier that provides scheduled air transportation for passengers and cargo in the United States and internationally. The company has an estimated earnings growth rate of 24.6% for this year and delivered an average positive earnings surprise of 3.78% for the past four quarters. It carries a Zacks Rank #1 and has a Growth Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Virginia-based Maximus Inc. (MMS - Free Report) provides business process services to government health and human services programs worldwide. The company saw solid earnings estimate revision of a penny over the past seven days for the fiscal year (ending September 2019) and has an estimated earnings growth rate of 9.41%. The stock has a Zacks Rank #2 and Growth Score of A.
Lowa-based Caseys General Stores Inc. (CASY - Free Report) operates convenience stores under the Casey's and Casey's General Store names. The company saw solid earnings estimate revision of 3 cents over the past 30 days for the fiscal year (ending April 2020) and has an estimated earnings growth rate of 6.9%. It has a Zacks Rank #1 and Growth Score of A.
Washington-based Microsoft Corporation (MSFT - Free Report) is engaged in developing, licensing and supporting software products, services and devices worldwide. It has seen solid earnings estimate revision of 12 cents for the fiscal year (ending June 2020) over the past month with an expected earnings growth rate of 9.9%. The stock has a Zacks Rank #2 and Growth Score of B.
Virginia-based Northrop Grumman Corporation (NOC - Free Report) operates as a security company that provides various systems, products and solutions in autonomous systems, cyber, space, strike, and logistics and modernization, as well as in command, control, communications and computers, intelligence, surveillance, and reconnaissance to customers worldwide. The company has seen solid earnings estimate revision of 18 cents for this year over the past month and delivered an average positive earnings surprise of 20.11% in the past four quarters. Northrop Grumman 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.