Dividend-paying securities are a major source of consistent income for investors when returns from the equity market are at risk. This is because investors can enjoy rising current income while anticipating capital appreciation irrespective of market conditions.
Honing in on 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.
Inside Dividend Growth Strategy
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 23.
Here are seven of the 23 stocks that fit the bill:
Virginia-based Booz Allen Hamilton Holding Corporation (BAH - Free Report) is engaged in providing management and technology consulting services to the U.S. government in the defense, intelligence and civil markets. It has seen positive earnings estimate revision of a penny for this year over the past one month for fiscal year (ending March 2020) and has an expected earnings growth rate of 11.23%. Booz Allen has a Zacks Rank #1 and Growth Score of B. 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 seen positive earnings estimate revision of a penny for this year over the past one month and has an expected earnings growth rate of 10.16%. 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 couple of cents over the past 30 days for fiscal year (ending January 2020) and has an expected earnings growth rate of 14.10%. The stock carries a Zacks Rank #2 and has a 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 company has an expected earnings growth rate of 36.5% for this year. The stock has a Zacks Rank #2 and Growth Score of B.
Washington-based Microsoft Corporation (MSFT - Free Report) is engaged in developing, licensing and supporting software products, services and devices worldwide. The company saw solid earnings estimate revision of a penny over the past 30 days for the fiscal year (ending June 2020) and has an estimated earnings growth rate of 10.11%. The stock has a Zacks Rank #2 and Growth Score of A.
Pennsylvania-based Comcast Corporation (CMCSA - Free Report) is a global media and technology company with two primary businesses, Comcast Cable and NBCUniversal. The company delivered an average positive earnings surprise of 7.24% for the past four quarters and has an expected earnings growth rate of 21.18% for this year. It has a Zacks Rank #2 and Growth Score of B.
Tennessee-based Cracker Barrel Old Country Store Inc. (CBRL - Free Report) develops and operates the Cracker Barrel Old Country Store concept in the United States. It has seen positive earnings estimate revision of 9 cents for this year over the past one month for fiscal year (ending August 2020) and has an expected earnings growth rate of 0.22%. The stock has a Zacks Rank #2 and Growth Score of A.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.