Though rising yields have dampened the appeal for dividend investing, a niche corner of this space is still in vogue. This is none other than the dividend growth strategy. Stocks with a strong history of dividend growth year over year form a healthy portfolio with greater scope of capital appreciation as opposed to simple dividend paying stocks or those that pay high yields.
Why Dividend Growth?
Stocks that have a strong history of dividend growth belong to mature companies, which are less susceptible to large swings in the market, and thus act as a hedge against economic or political uncertainty. At the same time, these offer downside protection with their consistent increase in payouts.
These stocks have superior fundamentals as opposed to their traditional dividend counterparts such as a sustainable business model, a long track record of profitability, rising cash flows, good liquidity, strong balance sheet and some value characteristics. They have a history of outperformance over the long term but not necessarily high dividend yields. All these makes dividend growth a quality and promising investment metric for the long term.
Further, a history of strong dividend growth indicates that dividend increase in the future 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 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.
Growth Style Score of B or better: Our research shows that stocks with a Growth Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
P/E Ratio Less than X-Industry: A ratio less than X-industry indicates that the stock is cheap and undervalued in that industry.
Following are six of the 14 stocks that fit the bill.
Lam Research Corporation (NASDAQ:LRCX): This California-based company designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits.
It is expected to see earnings growth of 44.76% for this fiscal year and has a P/E ratio of 14.21 versus the industry average of 21.3. Lam Research has a Zacks Rank #1 and a Growth Style Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Magna International Inc. (NYSE:MGA): This Canada-based company is an independent supplier of original equipment components, assemblies, modules and systems and related tooling for cars and light trucks.
Its earnings are expected to grow 14.87% this year while its P/E ratio stands at 9.3 compared with the industry average of 14.1. The stock has a Zacks Rank #2 and a Growth Style Score of A.
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.
The company has a P/E ratio of 10.41 compared with the industry average of 14.1 and its earnings are expected to grow 18.97% this year. It has a Zacks Rank #2 and a Growth Style Score of A.
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 has a P/E ratio of 20.31 compared with the industry average of 24 and its earnings are expected to grow 14.19% for this year. It has a Zacks Rank #2 and a Growth 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 is expected to see earnings growth of 11.49% this year and has a P/E ratio of 13.36 versus the industry average of 15.30. The stock has a Zacks Rank #1 and a Growth Style Score of B.
Broadridge Financial Solutions Inc. (NYSE:BR): This New York-based company is a leading global provider of technology-based outsourcing solutions to the financial services industry.
It is expected to see earnings growth of 16.93% this fiscal year and has a P/E ratio of 23.05 versus the industry average of 25.8. The stock has a Zacks Rank #2 and a Growth 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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