Investors are once again in search of dividend amid volatility and uncertainty. This is because dividend-paying securities are 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, honing in on stocks with a history of dividend growth leads to a healthy portfolio, with 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 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 20.
Here are five of the 20 stocks that fit the bill:
California-based ResMed Inc. (RMD - Free Report) develops, manufactures, distributes and markets medical devices and cloud-based software solutions that diagnose, treat and manage respiratory disorders comprising sleep-disordered breathing, chronic obstructive pulmonary disease, neuromuscular disease and other chronic diseases. The company has an estimated earnings growth rate of 12.6% for this year and delivered an average positive earnings surprise of 5.34% for the past four quarters. It sports a Zacks Rank #1 and has a Growth Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 over the past month for this fiscal year (ending March 2020) and has an expected earnings growth rate of 13%. Booz Allen has a Zacks Rank #2 and Growth Score of A.
Connecticut-based United Technologies Corporation (UTX - Free Report) provides high-end technology products and services to the building systems and aerospace industries worldwide. The company saw positive earnings estimate revision of a penny over the past 30 days for this year and has an estimated earnings growth rate of 10%. The stock has a Zacks Rank #2 and Growth Score of A.
California-based McGrath RentCorp (MGRC - Free Report) operates as a business-to-business rental company in the United States and internationally. The company delivered an average positive earnings surprise of 20.2% in the past four quarters and has an expected earnings growth rate of 15.7%. The stock has a Zacks Rank #1 and Growth Score of B.
Connecticut-based SS&C Technologies Holdings Inc. (SSNC - Free Report) delivers investment and financial management software and related services, focused exclusively on the financial services industry. The company has an estimated earnings growth rate of 27% for this year and delivered an average positive earnings surprise of 4.92% for the past four quarters. The stock has a Zacks Rank #2 and a 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.