While investors avoid stocks that do not have juicy yields, it is true that these low-yield stocks have a solid history of dividend growth that lead to outperformance.
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.
Stocks that have a strong history of dividend growth have superior fundamentals and form a healthy and safe portfolio as opposed to those that have high yields.
Dividend growth reflects a sustainable business model, a long track of profitability, rising cash flows, good liquidity, a 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 hike is likely in the future.
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 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 seven of the 28 stocks that fit the bill:
Big 5 Sporting Goods Corporation (NASDAQ:BGFV): This California-based company is a leading sporting goods retailer in the western United States, operating stores under the name Big 5 Sporting Goods. The stock saw positive earnings estimate revision of 15 cents over the past 90 days for this year with an expected earnings growth rate of 35.06%. 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.
Lear Corporation (NYSE:LEA): This Michigan-based company is a global leader in designing, developing, engineering, manufacturing, assembling and supplying automotive seating, electrical distribution systems and related components primarily to automotive original equipment manufacturers worldwide. For this year, the company saw a whopping earnings estimate revision of $1.17 over the past 90 days and has an expected earnings growth rate of 11.79%. It has a Zacks Rank #2 and a VGM Style Score of A.
Torchmark Corporation (NYSE:TMK): This Texas-based financial services holding company specializes in life and supplemental health insurance for middle-income Americans. The company delivered an average positive earnings surprise of 2.01% in the past four quarters and has an earnings growth rate of 2.88% for this year. The stock has a Zacks Rank #2 with a VGM Style Score of B.
Huntington Ingalls Industries Inc (NYSE: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 company saw solid earnings estimate revision of 86 cents over the past 90 days for this year and has an expected earnings growth rate of 11.13%. It has a Zacks Rank #2 and a VGM Style Score of A.
GATX Corporation (NYSE:GATX): This Illinois-based company is the leading global railcar lessor specializing in railcar and locomotive operating leasing, aircraft operating leasing, information technology leasing, and venture finance for customers in diverse industrial sectors worldwide. It saw solid earnings estimate revision of 10 cents for this year over the past three months, and delivered an average positive earnings surprise of 32.81% in the past four quarters. It has a Zacks Rank #2 and a VGM Style Score of A.
EnerSys (NYSE:ENS): This Pennsylvania-based company is a global leader in stored energy solutions for industrial applications. It saw solid earnings estimate revision of 11 cents for the full fiscal year (ending Mar 2018) over the past three months, and has expected earnings growth of 7.15%. It carries a Zacks Rank #2 and has a VGM Style Score of B.
Lazard Ltd (NYSE:LAZ): This Bermuda-based company is a preeminent international financial advisory and asset management firm that has long specialized in crafting solutions to the complex financial and strategic challenges of their clients. The company saw solid earnings estimate revision of 21 cents over the past 90 days for this year and has an expected earnings growth rate of 6.47%. It has a Zacks Rank #2 and a VGM Style 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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