Investors are once again in search for consistent and safe income in a near-zero interest environment, a series of drastic dividend cuts and rising U.S.-China tension. Nothing is better than dividend investing at this time. 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, with greater scope of capital appreciation as opposed to simple dividend-paying stocks or those with high yields.
Strong Dividend Growth Indicates Further Dividend Hike
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.
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:
Pennsylvania-based West Pharmaceutical Services Inc. (WST - Free Report) is the global drug delivery technology company that manufactures and sells containment and delivery systems for injectable drugs and healthcare products in the United States, Germany, Ireland, France, Other European countries, and internationally. The company has an estimated earnings growth rate of 9.9% for this year and delivered positive average earnings surprise of 17.99% in the past four quarters. 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.
Massachusetts-based Teradyne Inc. (TER - Free Report) is a leading provider of automated test equipment. It has an estimated earnings growth rate of 7.69% for this year and delivered average four-quarter positive earnings surprise of 11.03% on average. The stock has a Zacks Rank #2 and Growth Score of B.
Tennessee-based Dollar General Corporation (DG - Free Report) is a discount retailer providing various merchandise products across the United States. The company has seen upward earnings estimate revision of 7 cents over the past 30 days for the fiscal year (ending January 2021) and has an expected earnings growth rate of 11.89%. The stock has a Zacks Rank #2 and Growth Score of A.
California-based Applied Materials Inc. (AMAT - Free Report) is one of the world’s largest suppliers of equipment for the fabrication of semiconductor, flat panel liquid crystal displays, and solar photovoltaic (PV) cells and modules. The company has seen positive earnings estimate revision of 7 cents over the past 30 days for the fiscal year (ending October 2020) and has an expected earnings growth rate of 25.33%. It has a Zacks Rank #2 and Growth Score of B.
Ohio-based The Kroger Co. (KR - Free Report) operates as a retailer in the United States. The company operates supermarkets, multi-department stores, marketplace stores, and price impact warehouse stores. It has an estimated earnings growth rate of 12.27% for the year (ending January 2021) and delivered an average positive earnings surprise of 2.11% in the past four quarters. Kroger has a Zacks Rank #2 and Growth Score of A.
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Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.