Dividend-paying securities are the major source of consistent income for investors when returns from the equity market are at risk. Honing in on the growth in this approach leads to a healthy portfolio with a greater scope of capital appreciation as opposed to simple dividend paying out stocks or those with high yields.
Inside Dividend Growth Strategy
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.
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.
Current Price Under $100: Low-priced stocks could be attractive as these will enable investors to buy a greater number of shares instead of just a handful of higher-priced stocks for the same amount.
Here are five of the 11 stocks that fit the bill:
Wisconsin-based The Marcus Corporation MCS is engaged in the lodging and entertainment industries. The company has an estimated earnings growth rate of 14.29% for this year and has delivered an average positive earnings surprise of 8.89% in the past four quarters. The stock, currently trading at a price of $43.94, has a Zacks Rank #1 and Growth Score of A.
Pennsylvania-based Dick's Sporting Goods Inc. DKS is a leading full-line sporting goods retailer in the United States. The stock saw positive earnings estimate revision of six cents over the past 60 days for this fiscal year and delivered earnings surprises in the past four quarters, with an average beat of 18.23%. The stock has a Zacks Rank #2 and Growth Score of A. Shares of DKS are currently trading at $33.47.
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 seen positive earnings estimate revision of 14 cents over the past 30 days for this year and has expected earnings growth rate of 78.33%. The stock, trading at $71.83, sports a Zacks Rank #1 and has a Growth Score of A.
Hawaii-based Matson Inc. MATX operates as an ocean transportation and logistics company. It offers shipping services in Hawaii, Guam, and Micronesia islands and expedited service from China to southern California. The company has an estimated earnings growth rate of 32.58% for this year and delivered an average positive earnings surprise of 18.12% in the past four quarters. The stock, trading at $39.43, has a Zacks Rank #2 and Growth Score of A.
Tennessee-based Tractor Supply Company TSCO is the largest operator of rural lifestyle retail stores in America. It has an estimated earnings growth rate of 25.83% for this year and delivered an average positive earnings surprise of 3.43% in the past four quarters. The stock has a Zacks Rank #2 and Growth Score of A. Shares of TSCO are currently trading at $88.99.