The appeal for dividend investing has been on the rise in a low-rate environment. Though the strategy doesn’t offer dramatic price appreciation, it is a major source of consistent income for investors in any type of market.
In fact, investors are zeroing in on stocks that not only offer dividends but also consistently increase their payout. Stocks that have a strong history of dividend growth, as opposed to those that offer high yields, form a healthy portfolio with more scope for capital appreciation.
Dividend Growth: A Winning Strategy
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 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 year.
Top Zacks Rank: Stocks having a Zacks Rank #1 (Strong Buy) and 2 (Buy) generally outperform their peers in all types of market environments.
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.
Just these few criteria narrowed down the universe from over 7,700 stocks to just 10.
Here are five of the 10 stocks that fit the bill:
Atlanta-based PulteGroup Inc. PHM is engaged in homebuilding and financial services businesses, primarily in the United States. The company has a P/E ratio of 10.59 compared with the industry average of 11.40 and an expected earnings growth rate of 22.1% for this year. It has a Zacks Rank #1 and Growth Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
Nebraska-based Werner Enterprises Inc. WERN is a transportation and logistics company primarily focused on transporting truckload shipments such as retail store merchandise, consumer products, grocery products and manufactured products. The company has a P/E ratio of 20.32 compared with the industry average of 26.28 and delivered an earnings surprise in each of the past four quarters, with the average beat being 18.99%. The stock has a Zacks Rank #2 and Growth Score of A.
Massachusetts-based Thermo Fisher Scientific Inc. TMO is a provider of analytical instruments, equipment, reagents and consumables, software, and services for research, manufacturing, analysis, discovery, and diagnostics worldwide. It has a P/E ratio of 27.67 compared with the industry average of 49.09 and an expected earnings growth rate of 21.13% for this year. The stock has a Zacks Rank #2 and Growth Score of B.
Florida-based Superior Uniform Group Inc. SGC manufactures and sells apparel and accessories in the United States and internationally. The company has a P/E ratio of 12.32 compared with the industry average of 28.01. Its earnings are expected to grow 130.38% this year. It has a Zacks Rank #1 and Growth Score of B.
Idaho-based Boise Cascade L.L.C. BCC operates as a wood products manufacturer and building materials distributor. The company has a P/E ratio of 13.63 compared with the industry average of 23.43. Its earnings are expected to grow 59.8% this year. It has a Zacks Rank #1 and 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.
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PulteGroup, Inc. (PHM) : Free Stock Analysis Report
Thermo Fisher Scientific Inc. (TMO) : Free Stock Analysis Report
Boise Cascade, L.L.C. (BCC) : Free Stock Analysis Report
Werner Enterprises, Inc. (WERN) : Free Stock Analysis Report
Superior Uniform Group, Inc. (SGC) : Free Stock Analysis Report
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