Though rising yields have dampened the appeal for dividend investing, a niche corner of this space, comprising stocks that boast dividend growth, is still in vogue. Stocks with a strong history of dividend growth year over year form a healthy portfolio with greater scope of capital appreciation as opposed to simple dividend paying stocks or those that have high yields.
Dividend Growth: A Winning Strategy
Dividend growth stocks offer the best of both worlds –– potential for capital appreciation and rising income even in a volatile market. This is because these stocks belong to mature companies, which are less susceptible to large swings in the market, and simultaneously offer outsized payouts or sizable yields on a regular basis irrespective of the market direction.
Dividend growth reflects a sustainable business model, a long track of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics. All these superior fundamentals make dividend growth stocks promising investments for the long term. Further, a history of strong dividend growth indicates that a hike is likely in the future.
Though these stocks have a long history of outperformance compared with the broader stock market or any other dividend paying stock, it does not necessarily mean that they have the highest yields.
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.
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 15 stocks that fit the bill:
Pennsylvania-based Dick's Sporting Goods Inc. DKS is a leading full-line sporting goods retailer in the United States. The company has a P/E ratio of 11.91 compared with the industry average of 12.34 and delivered earnings surprises in the past four quarters, with the average beat being 18.23%. It has a Zacks Rank #1 and a Growth Score of A.
Washington-based Microsoft Corporation MSFT is engaged in developing, licensing, and supporting software products, services and devices worldwide. Its earnings are expected to grow 13.14% for the fiscal year ending June 2019 while its P/E ratio stands at 24.36 compared with the industry average of 30.55. The stock has a Zacks Rank #2 and a Growth Score of B.
Indiana-based Anthem Inc. ANTM operates as a health benefits company in the United States. The company has a P/E ratio of 18.05 compared with the industry average of 19.53 and an expected earnings growth rate of 30.1% for this year. The stock has a Zacks Rank #2 and a Growth Score of B.
Arkansas-based ArcBest Corporation ARCB provides freight transportation services and integrated logistics solutions worldwide. The stock is expected to see earnings growth of 173.68% this year and has a P/E ratio of 10.96 versus the industry average of 15.90. ArcBest has a Zacks Rank #1 and a Growth Score of A.
Ohio-based The Progressive Corporation PGR provides personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services primarily in the United States. The company has a P/E ratio of 15.03 compared with the industry average of 15.10 and its earnings are expected to grow 82.13% this year. It has a Zacks Rank #2 and a Growth Score of A.
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Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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ArcBest Corporation (ARCB) : Free Stock Analysis Report
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DICK'S Sporting Goods, Inc. (DKS) : Free Stock Analysis Report
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