The appeal for dividend ETFs has been rising on investors’ drive for juicy yields and consistent income amid heightened uncertainty and volatility. This is because investors can enjoy rising current income while anticipating capital appreciation irrespective of market conditions.
While there are several dividend stocks that could provide capital appreciation, honing in on stocks with a history of dividend growth leads to a healthy portfolio.
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.
Moreover, a history of dividend growth year over year leads to a healthy portfolio with greater scope of capital appreciation as opposed to simple dividend paying stocks or those with high yields. 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 appears as a winning strategy 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 revenues.
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 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.
Just these few criteria narrowed down the universe from over 7,700 stocks to just 15.
Here are five of the 15 stocks that fit the bill:
Oregon-based Lithia Motors Inc. (LAD - Free Report) is one of largest automotive retailers featuring most domestic and import franchises. The company delivered an average positive earnings surprise of 8.04% in the past four quarters and has an expected earnings growth rate of 12.84% for this year. 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.
Ireland-based Medtronic plc (MDT - Free Report) develops, manufactures, distributes and sells device-based medical therapies to hospitals, physicians, clinicians and patients worldwide. It has seen positive earnings estimate revision of 8 cents for this year over the past one month for fiscal year (ending April 2020) and has an expected earnings growth rate of 6.54%. The stock has a Zacks Rank #2 and Growth Score of B.
Minnesota-based Target Corporation (TGT - Free Report) operates large-format general merchandise and food discount stores in the United States, which include Target and SuperTarget. The company has seen positive earnings estimate revision of 21 cents over the past 30 days for fiscal year (ending January 2020) and has an expected earnings growth rate of 13.68%. The stock carries a Zacks Rank #2 and has a Growth Score of A.
Michigan-based Universal Forest Products Inc. (UFPI - Free Report) designs, manufactures and markets wood and wood-alternative products in North America, Europe, Asia and Australia. The company has an estimated earnings growth rate of 22.53% for this year and delivered an average positive earnings surprise of 0.12% for the past four quarters. It has a Zacks Rank #2 and Growth Score of A.
Nevada-based Allegiant Travel Company (ALGT - Free Report) is a leisure travel company that provides travel services and products to residents of under-served cities in the United States. The stock has seen positive earnings estimate revision of 8 cents over the past 30 days for this year and has an expected earnings growth rate of 40.77%. The stock has a Zacks Rank #2 and Growth Score of B.
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