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Dividend investing is in vogue amid huge volatility and uncertainty. Persistently high inflation and Fed’s aggressive rate hikes might push the economy into a recession and have been making investors jittery.

In such a scenario, dividends are major sources of consistent income for investors though they do not offer dramatic price appreciation. These stocks can reduce the volatility of a portfolio and tend to outperform in a choppy market.

In fact, stocks with a strong history of year-over-year dividend growth form a healthy portfolio, with a greater scope of capital appreciation, as opposed to simple dividend-paying stocks or those that have high yields. We have selected five dividend growth stocks — Boise Cascade (BCC - Free Report), RCI Hospitality Holdings Inc. (RICK - Free Report), Iron Mountain (IRM - Free Report), McKesson Corporation (MCK - Free Report), and National Fuel Gas Company (NFG - Free Report) — that could be compelling picks amid market volatility.
 

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 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 a dividend increase is likely in the future.

Moreover, a history of dividend growth year over year leads to a healthy portfolio with a greater scope of capital appreciation than 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 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.

Just these few criteria narrowed down the universe from over 7,700 stocks to just 18.

Here are five of the 18 stocks that fit the bill:

Idaho-based Boise Cascade operates as a wood products manufacturer and building materials distributor. It has seen a solid earnings estimate revision of 42 cents for this year over the past month and has an expected earnings growth rate of 13.97%.

Boise Cascade has a Zacks Rank #1 and a Growth Score of B. 

Texas-based RCI Hospitality owns and operates adult nightclubs that offer live adult entertainment, restaurant, and bar services. It saw a positive earnings estimate revision of 12 cents over the past 30 days for the fiscal year (ending Sep 2022) and has an expected earnings growth rate of 29.2%.

RCI Hospitality has a Zacks Rank #2 and a Growth Score of A.

Massachusetts-based Iron Mountain provides records & information management services and data center space & solutions in 59 countries. It has estimated earnings growth of 37% for this year and delivered an average earnings surprise of 9.5% in the past four quarters.

Iron Mountain has a Zacks Rank #2 and a Growth Score of B.

California-based McKesson is a healthcare services and information technology company. The stock has estimated earnings growth of 3.04% for the fiscal year (ending March 2023) and delivered an average earnings surprise of 13% in the past four quarters.

McKesson has a Zacks Rank #2 and a Growth Score of B.

New York-based National Fuel Gas is an integrated energy company, which has natural gas assets located in the prolific Appalachian basin and oil-producing assets in California. It has an estimated earnings growth rate of 38.5% for the fiscal year (ending September 2022) and delivered an average earnings surprise of 9.05% in the past four quarters.  

National Fuel Gas has a Zacks Rank #1 and a Growth Score of B.

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