The second wave of coronavirus infections has flared up volatility and made investors scurry for safety and regular income. This has resulted in higher appeal for dividend investing. Though the strategy doesn’t offer dramatic price appreciation, it is a major source of consistent income for investors in any type of market.

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 greater scope of capital appreciation as opposed to simple dividend-paying stocks or those with high yields.

Inside the 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 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.

Just these few criteria narrowed down the universe from over 7,700 stocks to just 13.

Here are five of the 13 stocks that fit the bill:

Ohio-based The Kroger Co. (KR - Free Report) operates as a retailer in the United States. The company operates supermarkets, multi-department stores, marketplace stores, and price impact warehouse stores. It has seen upward earnings estimate revision of 10 cents over the past seven days for the fiscal year (ending January 2021) and has an expected earnings growth rate of 26.4%. Kroger has a Zacks Rank #1 and Growth Score of A.

Illinois-based AbbVie Inc. (ABBV - Free Report) has become one of the top-most pharma companies after it acquired Botox maker Allergan in a cash-and-stock deal for $63 billion in May 2020. The company delivered an average positive earnings surprise of 2.77% in the last four quarters and has an expected earnings growth rate of 17.90% for this year. It has a Zacks Rank #2 and Growth Score of B.

Illinois-based W.W. Grainger Inc. (GWW - Free Report) is a broad line, business-to-business distributor of maintenance, repair, and operating products and services. The company has seen upward earnings estimate revision of 18 cents over the past seven days for this year. It has a Zacks Rank #2 and Growth Score of A.

Pennsylvania-based West Pharmaceutical Services Inc. (WST - Free Report) is a global drug delivery technology company that applies proprietary materials’ science, formulation research and manufacturing innovation to advance the quality, therapeutic value, speed, and availability of pharmaceuticals, biologics, vaccines and consumer healthcare products. The company has an estimated earnings growth rate of 11.4% for this year and delivered positive average earnings surprise of 17.99% in the past four quarters. It has a Zacks Rank #1 and Growth Score of A.

Taiwan-based Taiwan Semiconductor Manufacturing Company Ltd. (TSM - Free Report) is engaged in manufacturing, selling, packaging, testing, and computer-aided design of integrated circuits and other semiconductor devices. It has an estimated earnings growth rate of 30.2% for this year and delivered a four-quarter positive earnings surprise of 4.22% on average. Taiwan Semiconductor has a Zacks Rank #2 and Growth Score of B.