Image: Bigstock

While rising yields have somewhat dulled the appeal for dividend investing, stocks that consistently pay a higher dividend are still in vogue. In particular, 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.

Dividend Growth: A Winning 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 environments.

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.

Just these few criteria narrowed down the universe from over 7,700 stocks to just 17.

Here are five of the 17 stocks that fit the bill:

Pennsylvania-based Vishay Intertechnology Inc. (VSH Quick Quote VSH - Free Report) is a global manufacturer and supplier of discrete semiconductors and passive components. The company has a P/E ratio of 14.28 compared with the industry average of 20.55. Its earnings are expected to grow 88% this year. The stock has a Zacks Rank #1 and a Growth Score of B.

Colorado-based M.D.C. Holdings Inc. (MDC Quick Quote MDC - Free Report) engages in homebuilding and financial service businesses in the United States. The company has a P/E ratio of 8.25 compared with the industry average of 8.87. Its earnings are expected to grow 34.6% this year. The stock has a Zacks Rank #2 and a Growth Score of A.

Indiana-based Hillenbrand Inc (HI Quick Quote HI - Free Report) is a global diversified industrial company with multiple market-leading brands that serve a wide variety of industries across the globe. The company has a P/E ratio of 14.75 compared with the industry average of 15.23. Its earnings are expected to grow 8.7% for the fiscal year (ending September 2021). The stock has a Zacks Rank #2 and a Growth Score of A.

Georgia-based AGCO Corporation (AGCO Quick Quote AGCO - Free Report) is a leading manufacturer and distributor of agricultural equipment and related replacement parts. The company has a P/E ratio of 18.99 compared with the industry average of 22.51, and an expected earnings growth rate of 29.9% for this year. The stock has a Zacks Rank #2 and a Growth Score of A.

New York-based The Goldman Sachs Group Inc. (GS Quick Quote GS - Free Report) is a leading global financial holding company providing investment banking, securities, and investment management services to a diversified client base. The company has a P/E ratio of 11.56 compared with the industry average of 14.49. Its earnings are expected to grow 22% this year. The stock has a Zacks Rank #2 and a Growth Score of A.