Although rising rates and a skyrocketing stock market have dulled the attractiveness for dividend stocks, Trump’s biggest tax overhaul in decades is luring investors to these. This is because lower corporate taxes would boost companies’ profitability leading to fatty dividends and in turn outperformance of stocks having a history of dividend growth year over year.

Inside 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.

Moreover, a history of dividend growth year over year 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 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 five of the 13 stocks that fit the bill:

New York-based Evercore Inc. (EVR - Free Report) operates as an independent investment banking advisory firm in the United States, Europe, Latin America and internationally. The company has a P/E ratio of 14.36 compared with the industry average of 17.58 and an expected earnings growth rate of 30.61% for this year. It has a Zacks Rank #1 and a Growth Style Score of A. 

Ohio-based Owens Corning Inc. (OC - Free Report) is a world leader in building materials systems and composite solutions. It is expected to see earnings growth of 23.53% this year and has a P/E ratio of 17.87 versus the industry average of 19.14. Owens Corning has a Zacks Rank #2 and a Growth Style Score of A.

Pennsylvania-based Vishay Intertechnology Inc. (VSH - Free Report) is a global manufacturer and supplier of discrete semiconductors and passive components. It is expected to see earnings growth of 12.24% this year and has a P/E ratio of 14.44 versus the industry average of 17.88. The stock has a Zacks Rank #2 and a Growth Style Score of A.

Illinois-based Jones Lang LaSalle Inc. (JLL - Free Report) is a full-service real estate firm that 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 17.11 versus the industry average of 18.25 and an expected earnings growth rate of 7.55% for this year. The stock has a Zacks Rank #2 and a Growth Style Score of A.

California-based Lam Research Corp. (LRCX - Free Report) designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. It is expected to see earnings growth of 48.40% for this fiscal year (ending June 2018) and has a P/E ratio of 14.53 versus the industry average of 15.48. Lam Research has a Zacks Rank #2 and a Growth Style Score of A.