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:
Huntington Ingalls Industries Inc (HII): This Virginia-based company is engaged in designing, building, overhauling, and repairing ships primarily for the U.S. Navy and the U.S. Coast Guard. The stock saw a solid earnings estimate revision by 43 cents over the past 90 days for 2017. It gained 60.5% over the past one-year and has a Zacks Rank #2 with a VGM Style Score of A.
Torch mark Corporation (TMK): This Texas-based financial services holding company specializes in life and supplemental health insurance for middle-income Americans. The stock delivered an average positive earnings surprise of 0.90% in three of the past four quarters and has an earnings growth rate of 5.23% for 2017. The stock is up 42.1% over the past one-year and has a Zacks Rank #2 with a VGM Style Score of B.
Scripps Networks Interactive, Inc. (SNI): This Tennessee-based company is the leading developer of lifestyle-oriented content for linear and interactive video platforms in the United States, the United Kingdom and other European markets, the Middle East and Africa, the Asia-Pacific, and Latin America. The stock delivered an average positive earnings surprise of 27.89% in the past four quarters and has a modest earnings growth rate of 0.45% for 2017. It returned 29.6% in the trailing one-year period. The stock has a VGM Style Score of B and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Citigroup Inc (C): This New York-based company is a global financial services company that provides various financial products and services for consumers, corporations, governments, and institutions worldwide. The stock saw earnings estimate revision of 18 cents for 2017 over the past 90 days with an expected earnings growth rate of 11.13%. Citigroup gained 41.1% in the same timeframe and has a Zacks Rank #2 with a VGM Style Score of B.
Southwest Gas Holdings Inc (SWX): This Nevada-based company is engaged in the business of purchasing, transporting and distributing natural gas in portions of Arizona, Nevada and California. It saw positive earnings estimate revision by a penny for 2017 over the past 90 days, with an expected growth rate of 9.86%. Southwest Gas added 39.3% and has a Zacks Rank #2 with a VGM Style 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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