Honing in on dividend is a tried-and-true practice during market turbulence. These cash payouts are major sources of consistent income for investors when returns from the equity market are at risk.
In particular, stocks that have a strong history of dividend growth as opposed to those that pays high yields form a healthy portfolio with more scope for capital appreciation.
Why is Dividend Growth Better?
Stocks that have a strong history of dividend growth generally act as a hedge against economic or political uncertainty as these belong to mature companies, which are less susceptible to large swings in the market while simultaneously offer downside protection with their consistent increase in payouts.
These stocks pose 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 a promising investment as opposed to their traditional dividend counterparts.
Further, a history of strong dividend growth indicates that a future hike is likely. This makes the portfolio healthy and safe.
Furthermore, these have a long history of outperformance over the long term. However, 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 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.
- Top Zacks Rank: 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 19 stocks that fit the bill:
MKS Instruments, Inc. (NASDAQ:MKSI): This Massachusetts-based company is a leading worldwide developer, manufacturer and supplier of instruments, components and subsystems used to measure, control and analyze gases in semiconductor manufacturing and similar industrial manufacturing processes. The company has seen strong earnings estimate revision of $1.00 over the past 90 days for this year and has an expected earnings growth rate of 63.83%. It has a VGM Style Score of B and sports a Zacks Rank #1.
Hasbro, Inc. (NASDAQ:HAS): This Rhode Island-based company is a worldwide leader in children’s and family leisure time and entertainment products and services, including the design, manufacture and marketing of games and toys ranging from traditional to high-tech. It has seen solid earnings estimate revision of 22 cents for this year over the past three months, with an expected earnings growth rate of 9.87%. The stock has a Zacks Rank #2 and a VGM Style Score of A.
Torch mark 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 3.04% for this year. The stock has a Zacks Rank #2 with a VGM Style Score of B.
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 has seen solid earnings estimate revision of a nickel 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 B.
Anthem Inc (NASDAQ:ANTM): This Indiana-based company operates as a health benefits company in the United States. The stock has seen positive earnings estimate revision of 25 cents over the past 90 days for this year with an expected earnings growth rate of 6.93%. The stock has a Zacks Rank #2 and a VGM Style Score of A.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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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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