After a stellar 2016, U.S. stocks again seem to be caught in volatile trading as Trump takes office. Amid such a backdrop, investors’ are looking for steady income along with some growth attributes. For them, picking stocks that not only pay dividends but also consistently increase their payout appears a winning strategy.
This is because stocks with a strong history of dividend growth ensure steady returns and act as a hedge against any market downturn and economic or political turmoil.
These stocks belong to mature companies, which are less susceptible to large swings in the market. Simultaneously, these offer outsized payouts or sizable yields on a regular basis irrespective of the market direction. As a result, these stocks provide greater stability and more scope for capital appreciation as opposed to those that pay high yields.
Additionally, these companies have a sustainable business model, a long track of profitability, rising cash flows, good liquidity, strong balance sheet and some value characteristics. All these superior fundamentals make dividend growth stocks a quality and promising investment for the long term.
Further, a history of strong dividend growth indicates that a future hike is likely. This makes the portfolio healthy and safe.
Though these stocks have long history of outperformance compared to the broad stock market or any other dividend paying stocks, it does not necessarily mean that they have the highest yields.
Here are the screening parameters that could result in a winning dividend growth portfolio:
- 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 a 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.
- Zacks Rank Less than 3: Stocks having a Zacks Rank #1 (Strong Buy) and 2 (Buy) generally outperform their peers in all types of market environment.
- VGM Style Score of B or better: This is simply a weighted combination of Value, Growth and Momentum. This when combined with a Zacks Rank #1 or #2 offers the best upside potential.
Here are five of the 21 stocks that fit the bill: