Given the collapse in yields and market uncertainty, the appeal for dividend ETFs has been on rise on investors’ drive for juicy yields and consistent income. 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 a greater scope of capital appreciation as opposed to simple dividend paying stocks or those with high yields.
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.
P/E Ratio Less than X-Industry: A ratio less than X-industry indicates that the stock is cheap and undervalued in that industry.
Here are five of the eight stocks that fit the bill:
Minnesota-based Target Corporation TGT operates large-format general merchandise and food discount stores in the United States, which include Target and SuperTarget. The company has a P/E ratio of 17.10 compared with the industry average of 20.98 and an expected earnings growth rate of 13.73% for fiscal year (ending January 2020). The stock carries a Zacks Rank #2 and has a Growth Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ireland-based Medtronic plc MDT develops, manufactures, distributes and sells device-based medical therapies to hospitals, physicians, clinicians and patients worldwide. It has a P/E ratio of 19.24 compared with the industry average of 27.95 and an expected earnings growth rate of 6.51% for fiscal year (ending April 2020). The stock has a Zacks Rank #2 and Growth Score of B.
Washington-based Microsoft Corporation MSFT is engaged in developing, licensing and supporting software products, services and devices worldwide. The company has a P/E ratio of 25.92 compared with the industry average of 30.06. Its earnings are expected to grow 9.89% for the fiscal year (ending June 2020). The stock has a Zacks Rank #2 and Growth Score of B.
Massachusetts-based Teradyne Inc. TER designs, develops, manufactures, sells and supports automatic test equipment worldwide. Its earnings are expected to grow 5.49% this year while its P/E ratio stands at 20.96 compared with the industry average of 22.60. The stock has a Zacks Rank #2 and Growth Score of B.
Florida-based Darden Restaurants Inc. DRI owns and operates full-service restaurants in the United States and Canada. The company has a P/E ratio of 18.97 compared with the industry average of 22.93. Its earnings are expected to grow 5.49% this year. It has a Zacks Rank #2 and Growth Score of B.
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