Though the prospect of faster-than-expected rates hikes and rising bond yields have diminished the appeal of dividend stocks, applying some smart beta strategies to the dividend investing world could fetch higher returns in a rising rate environment.
In particular, stocks that have a strong history of dividend growth are usually of high quality and deliver excellent risk-adjusted returns in the longer term. When compared with the ones that pay out high yields, dividend growth stocks form a healthy portfolio, with more scope for capital appreciation.
Inside Dividend Growth Stocks
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 as well as stock market volatility. At the same time, these 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 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 15 stocks that fit the bill:
California-based Lam Research Corporation (NASDAQ:LRCX) designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. It has seen solid earnings estimate revision of 78 cents over the past 30 days for the fiscal year (ending June 2018) and has an expected earnings growth rate of 75.75%. Lam Research has a Zacks Rank #1 and a VGM Score of A.
Indiana-based Anthem Inc (NYSE:ANTM) operates as a health benefits company in the United States. The stock has seen positive earnings estimate revision of 26 cents over the past 90 days for this year with an expected earnings growth rate of 27.74%. The stock has a Zacks Rank #2 and a VGM Score of A.
Virginia-based Science Applications International Corp (NYSE:SAIC) is engaged in transaction, technical, engineering and enterprise IT services business. It has an estimated earnings growth rate of 21.25% for fiscal year (ending January 2019) and has delivered an average positive earnings surprise of 15.78% in the past four quarters. The stock has a Zacks Rank #1 and a VGM Score of B.
Canada-based Magna International Inc. (NYSE:MGA) is an independent supplier of original equipment components, assemblies, modules and systems and related tooling for cars and light trucks. It has seen positive earnings estimate revision of seven cents for this year over the past one month and has an expected earnings growth rate of 13.93%. The stock has a Zacks Rank #2 and a VGM Score of A.
Tennessee-based Dollar General Corp. (NYSE:DG) is a discount retailer providing various merchandise products in the southern, southwestern, midwestern and eastern United States. It is expected to see earnings growth of 33.85% for fiscal year (ending Jan 1, 2019) and delivered an average positive earnings surprise of 2.31% in the last four quarters. The stock has a Zacks Rank #2 and a VGM 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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