While rising yields have dulled the appeal for dividend investing, stocks that consistently pay higher dividend are still in vogue.
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, while simultaneously offer outsized payouts or sizable yields on a regular basis irrespective of the market direction.
Additionally, these companies have a sustainable business model and enjoy competitive advantages, 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 quality and promising investments 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 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 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 22 stocks that fit the bill:
EnerSys (ENS): This Pennsylvania-based company is a global leader in stored energy solutions for industrial applications. It saw solid earnings estimate revision of 10 cents for the fiscal year (ending March 2017) over the past three months, and has an expected earnings growth of 19.21%. It has a Zacks Rank #2 and a VGM Style Score of A.
Broadcom Limited (AVGO): This Singapore-based company designs, develops and supplies a range of complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products worldwide. The stock saw a solid earnings estimate revision of 72 cents for the fiscal year (ending October 2017) over the past 90 days and has an expected earnings growth rate of 23.97%. 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.
Pool Corporation (POOL): This Louisiana-based company distributes swimming pool supplies, equipment and related leisure products in North America, Europe, South America and Australia. The stock saw positive earnings estimate revision of 28 cents over the past 90 days for this year and has an expected earnings growth rate of 17.44%. The stock has a Zacks Rank #1 and a VGM Style Score of B.
The Allstate Corp (ALL): This Illinois-based company is engaged in property-liability insurance and life insurance business in the United States and Canada. The stock saw a solid earnings estimate revision by 11 cents over the past 90 days for this year and has an expected earnings growth rate of 28.07%. It has a Zacks Rank #2 with a VGM Style Score of A.
Tall grass Energy Partners LP (TEP): This Kansas-based company owns, operates, acquires and develops midstream energy assets primarily in North America. It saw positive earnings estimate revision of 47 cents for 2017 over the past 90 days, and has an expected growth rate of 32.91%. Tallgrass 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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