As bouts of volatility and uncertainty are playing foul in the stock market, investors are looking for both growth and income in their portfolios. This can be easily achieved by honing in on companies that not only pay dividends but also consistently increase their payout. As such, investors can enjoy rising current income while anticipating capital appreciation, irrespective of market conditions.
A Peep Into The 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 and leads to a healthy portfolio with a greater scope of capital appreciation as opposed to simple dividend paying stocks or those with high yields.
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 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 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 12 stocks that fit the bill:
California-based Intel (INTC - Free Report) is one of the world's largest semiconductor chip maker. The company has a P/E ratio of 12.90 compared with the industry average of 14.18. Its earnings are expected to grow 16.47% this year. It sports a Zacks Rank #1 and has a Growth Score of B.
Ohio-based The Kroger Co. (KR - Free Report) is one of the world's largest food retailers. It also manufactures and processes food products for sale in its supermarkets. The company has a P/E ratio of 13.20 compared with the industry average of 17.61 and an expected earnings growth rate of 3.92% for this fiscal year. It has a Zacks Rank #2 and Growth Score of A.
Virginia-based Science Applications International Corporation (SAIC - Free Report) provides technical, engineering, and enterprise information technology (IT) services primarily in the United States. The company has a P/E ratio of 19.03 compared with the industry average of 20.85 and its earnings are expected to grow 26.35% this fiscal year. It has a Zacks Rank #1 and Growth Score of B.
Virginia-based Booz Allen Hamilton Holding Corporation (BAH - Free Report) is engaged in providing management and technology consulting services to the U.S. government in the defense, intelligence, and civil markets. It is expected to see earnings growth of 22.69% for this fiscal and has a P/E ratio of 18.81 versus the industry average of 19.18. Booz Allen has a Zacks Rank #2 and Growth Score of A.
Massachusetts-based Analog Devices Inc. (ADI - Free Report) is a world leader in the design, manufacture, and marketing of a broad portfolio of high-performance analog, mixed-signal, and digital signal processing (DSP) integrated circuits (ICs) used in virtually all types of electronic equipment. It has a P/E ratio of 16.83 versus the industry average of 19.72 and an expected earnings growth rate of 22.88% for this fiscal. The stock carries a Zacks Rank #2 and has a Growth Score of B.
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