In the New Year, investors are eyeing both income and growth amid heightened volatility and uncertainty. This can easily be achieved by zeroing in on stocks that not only pay dividends but also consistently increase their payout.
Dividend Growth: A Winning Strategy
Stocks that have a strong history of dividend growth as opposed to those that have high yields form a healthy portfolio with more scope for capital appreciation. This is because these stocks act as a hedge against economic or political uncertainty as well as stock market volatility. Simultaneously, these offer outsized payouts or sizable yields on a regular basis irrespective of the market direction.
Additionally, these stocks have superior fundamentals that make dividend growth a quality and promising investment for the long term. These include a sustainable business model, a long track of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics. Further, a history of strong dividend growth indicates that dividend increase is likely in the future.
Although these stocks do not necessarily have the highest yields, they have outperformed for a longer period than the broader stock market or any other dividend-paying stock.
As a result, picking dividend growth stocks appears as a winning strategy 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 revenues.
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 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.
P/E Ratio Less than X-Industry: A ratio less than X-industry indicates that the stock is cheap and undervalued in that industry.
Here are five of the 13 stocks that fit the bill:
Ohio-based The Progressive Corporation PGR provides personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services primarily in the United States. The company has a P/E ratio of 12.64 compared with the industry average of 16.11 and an expected earnings growth rate of 1.79% for this year. The stock sports a Zacks Rank #1 and has a Growth Score of A.
California-based Tetra Tech Inc. TTEK is a leading provider of consulting, engineering, program management, construction management, and technical services. It has a P/E ratio of 17.98 compared with the industry average of 32.14 and an expected earnings growth rate of 9.09% for fiscal year (ending September 2019). The stock has a Zacks Rank #2 and a Growth Score of A.
Iowa-based Caseys General Stores Inc. CASY operates convenience stores under the Casey's and Casey's General Store names. The company has a P/E ratio of 25.84 compared with the industry average of 26.23. Its earnings are expected to grow 28.35% this fiscal year (ending April 2019). It has a Zacks Rank #1 and a Growth Score of B.
Texas-based BG Staffing Inc BGSF is a national provider of temporary staffing services across a diverse set of industries. Its earnings are expected to grow 61.39% this year while its P/E ratio stands at 10.81 compared with the industry average of 12.15. The stock has a Zacks Rank #2 and a Growth Score of A.
Indiana-based Anthem Inc. ANTM operates as a health benefits company in the United States. The company has a P/E ratio of 16.77 compared with the industry average of 18.11 and an expected earnings growth rate of 12.36% for this year. The stock has a Zacks Rank #2 and a Growth Score of B.