Given that the stock market is at its peak, investors are looking for both income and growth in their portfolios. This can easily be achieved by focusing on stocks that not only pay dividends but also consistently increase their payout.  

Dividend Growth: A Winning Strategy

Stocks that have a strong history of dividend growth as opposed to those that pay high yields form a healthy portfolio with more scope for capital appreciation. This is because these stocks act as a hedge against economic or political uncertainty as well as stock market volatility. Simultaneously, these offer outsized payouts or sizable yields on a regular basis irrespective of the market direction.

Additionally, these stocks have superior fundamentals compared to other dividend-paying stocks as dividend growth reflects a sustainable business model, a long track of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics. All these make dividend growth a quality and promising investment for the long term. Further, a history of strong dividend growth indicates that dividend increase in the future is likely. This makes the portfolio healthy and safe.

However, the long history of outperformance by dividend growth stocks compared with the broader stock market or any other dividend-paying stocks does not necessarily mean that they have the highest yields.

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 Style 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 six of the 14 stocks that fit the bill:

PetMed Express Inc. (PETS - Free Report): This Florida-based company is America's largest pet pharmacy, delivering prescription and non-prescription pet medication, and health and nutritional supplements for dogs and cats. The company has a P/E ratio of 22.07 compared with the industry average of 46.25. Its earnings are expected to grow 41.60% this fiscal year. It has a Zacks Rank #1 and a Growth Style Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Microsoft Corporation (MSFT - Free Report): This Washington-based company is engaged in developing, licensing, and supporting software products, services, and devices worldwide. Its earnings are expected to grow 1.68% this year while its P/E ratio stands at 25.00 compared with the industry average of 38.96. The stock has a Zacks Rank #2 and a Growth Style Score of A.

The Greenbrier Companies Inc. (GBX - Free Report): This Oregon-based company is a leading supplier of transportation equipment and services to the railroad and related industries. It is expected to see earnings growth of 3.72% for this fiscal year and has a P/E ratio of 13.13 versus the industry average of 18.11. Greenbrier Companies has a Zacks Rank #1 and a Growth Style Score of B.

Rockwell Collins, Inc. (COL - Free Report): This Iowa-based company designs, produces and supports communications and aviation systems for commercial and military customers. The company has a P/E ratio of 18.93 compared with the industry average of 22.15 and an expected earnings growth rate of 16.73% for this fiscal year. It has a Zacks Rank #2 and a Growth Style Score of B.

Jones Lang LaSalle Incorporated (JLL - Free Report): This Illinois-based full-service real estate firm provides management services, corporate and financial services and investment management services to corporations and other real estate owners, users and investors worldwide. It has a P/E ratio of 16.67 versus the industry average of 19.59. The stock has a Zacks Rank #2 and a Growth Style Score of B.

Owens Corning Inc. (OC - Free Report): This Ohio-based company is a world leader in building materials systems and composite solutions. It is expected to see earnings growth of 18.89% this year and has a P/E ratio of 18.90 versus the industry average of 20.18. Owens Corning has a Zacks Rank #2 and a Growth Style Score of A.