Amid bouts of volatility and uncertainty, nothing seems to be a better strategy than picking the dividend-focused stocks. This is because investors can enjoy rising current income, while anticipating capital appreciation irrespective of market conditions.
While there are several dividend stocks that could provide capital appreciation, honing in on stocks with a history of dividend growth leads to a healthy portfolio, with a greater scope of capital appreciation as opposed to simple dividend paying stocks or those with high yields.
Looking Into the Strategy
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.
Growth 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.
Here are six of the 16 stocks that fit the bill:
Oregon-based Lithia Motors Inc. LAD is one of largest automotive retailers featuring most domestic and import franchises. The company delivered an average positive earnings surprise of 3.49% in the past four quarters and has an expected earnings growth rate of 11.72%. The stock has a Zacks Rank #1 and Growth Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
New York-based OUTFRONT Media Inc. OUT is a lessor of advertising space on out-of-home advertising structures and sites across the United States, Canada and Latin America. The company has seen positive earnings estimate revision of a penny over the past 30 days for this year and has an expected earnings growth rate of 6.05%. OUTFRONT Media has a Zacks Rank #2 and Growth Score of B.
Maryland-based Lockheed Martin Corporation LMT is a global security and aerospace company principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. It has seen solid earnings estimate revision of 12 cents over the past 30 days for this year and has an expected earnings growth rate of 16.71%. The stock has a Zacks Rank #2 and Growth Score of A.
Virginia-based Maximus Inc. MMS is an extremely dynamic and complex organization that offers government and industry a range of unique services, products and solutions. The company has an estimated earnings growth rate of 8.82% for fiscal year (ended September 2019) and delivered an average positive earnings surprise of 9.04% for the past four quarters. The stock has a Zacks Rank #2 and Growth Score of A.
Washington-based Microsoft Corporation MSFT is engaged in developing, licensing and supporting software products, services and devices worldwide. Its earnings are expected to grow 18.04% for the fiscal year ending June 2019. Microsoft delivered an average positive earnings surprise of 9.82% in the past four quarters. The stock has a Zacks Rank #2 and Growth Score of B.
Arizona-based Pinnacle West Capital Corporation PNW is an investor-owned electric utility holding company. It has an estimated earnings growth rate of 6.83% for this year and delivered an average positive earnings surprise of 4.97% in the past four quarters. The stock has a Zacks Rank #2 and Growth Score of B.
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.
The Research Wizard is a great place to begin. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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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