Dividend investing remains a popular strategy for investors in any type of market though it does not offer dramatic price appreciation. While there are several dividend stocks that could provide capital appreciation, zeroing in on stocks with a history of dividend growth leads to a healthy portfolio, with greater scope for capital appreciation as opposed to simple dividend-paying stocks or those with high yields.
We have selected five dividend growth stocks — Diamondback Energy FANG, J.B. Hunt Transport Services JBHT, Lam Research LRCX, Lowe's Companies LOW and Carriage Services CSV — that could be compelling picks.
Why Dividend Growth Is Better?
Stocks that have a strong history of dividend growth belong to mature companies 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 five of the 19 stocks that fit the bill:
Texas-based Diamondback Energy Inc. is an independent oil and gas exploration & production company, with primary focus on the Permian Basin. FANG saw solid earnings estimate revision of 45 cents over the past 30 days for this year and has an estimated earnings growth rate of 269.7%.
Diamondback Energy has a Zacks Rank #1 and Growth Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
Arkansas-based J.B. Hunt Transport Services is a provider of a broad range of transportation services to a diverse group of customers through the United States, Canada and Mexico. JBHT has an estimated earnings growth rate of 44.5% for this year and delivered an average earnings surprise of 9.89% for the past four quarters.
J.B. Hunt has a Zacks Rank #2 and Growth Score of A.
California-based Lam Research Corporation supplies wafer fabrication equipment and services to the semiconductor industry. LRCX has an expected earnings growth rate of 25.9% for fiscal year (ending June 2022) and delivered an average earnings surprise of 7.84% for the past four quarters.
Lam Research has a Zacks Rank #2 and Growth Score of B.
North Carolina-based Lowe's has evolved as one of the world’s leading home improvement retailer offering services to homeowners, renters and commercial business customers. LOW saw solid earnings estimate revision of 56 cents over the past 30 days for the fiscal year (ending January 2022) and has an expected earnings growth rate of 33.7%.
Lowe’s has a Zacks Rank #2 and Growth Score of B.
Texas-based Carriage Services is a leading provider of death care services and products in the United States. CSV delivered an average earnings surprise of 27.96% for the past four quarters and has an expected earnings growth rate of 64%.
Carriage Services carries a Zacks Rank #1 and has a 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.
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J.B. Hunt Transport Services, Inc. (JBHT) : Free Stock Analysis Report
Lowe's Companies, Inc. (LOW) : Free Stock Analysis Report
Lam Research Corporation (LRCX) : Free Stock Analysis Report
Carriage Services, Inc. (CSV) : Free Stock Analysis Report
Diamondback Energy, Inc. (FANG) : Free Stock Analysis Report
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