In a low interest rate environment and an aging bull market, dividend stocks are in demand given investors’ drive for higher income. In particular, the Fed has signaled that it will keep interest rates steady this year after three rate cuts last year, raising the appeal for dividend-paying stocks.
Further, dividend-paying securities are the major sources of consistent income when returns from the equity market are at risk. In particular, focusing on growth level in this strategy leads to higher returns.
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.
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 19.
Here are seven of the 19 stocks that fit the bill:
Florida-based Marriot Vacations Worldwide Corporation (VAC - Free Report) is a leading global vacation company that offers vacation ownership, exchange, rental, resort and property management services. The company has an expected earnings growth rate of 13.6% for 2020. 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.
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 9.1% for 2020 and delivered an average positive earnings surprise of 4.92% for the past four quarters. The stock has a Zacks Rank #2 and Growth Score of A.
Pennsylvania-based AMETEK Inc. (AME - Free Report) is one of the leading manufacturers of electronic appliances and electromechanical devices. The stock has seen positive earnings estimate revision of a penny over the past 30 days for this year and has an expected earnings growth rate of 6.7%. 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 9 cents for this year over the past month and has an estimated earnings growth rate of 12.9%. Northrop Grumman 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. It delivered an average positive earnings surprise of 8.58% for the past four quarters and has an expected earnings growth rate of 7.6% for the fiscal year (ending January 2021). The stock has a Zacks Rank #2 and Growth Score of B.
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 one month for fiscal year (ending March 2020) and has an expected earnings growth rate of 13.4%. Booz Allen has a Zacks Rank #2 and Growth Score of A.
Minnesota-based The Toro Company (TTC - Free Report) is a leading worldwide provider of innovative solutions for the outdoor environment, including turf, snow and ground engaging equipment and irrigation and outdoor lighting solutions. The stock has seen positive earnings estimate revision of a couple of cents over the past 30 days for fiscal year (ending October 2020) and has an expected earnings growth rate of 12.0%. It has a Zacks Rank #2 and Growth Score of B.
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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.