In the first half of May, investors braced themselves for a rate hike this month following upbeat comments from some Fed officials and encouraging economic data. But the situation reversed after the release of the jobs data last week, which showed that the economy generated significantly lower-than-expected jobs in May. Meanwhile, the Fed Chairperson Janet Yellen failed to provide any significant clue to the timing of the next rate hike.

This indication that low rates might prevail in the coming days calls for an investing strategy that can provide steady returns even in this low-rate environment. While dividend investing can be considered a way out, stocks with strong dividend growth potential may lead to greater returns when the rates are low.

Discouraging Labor Data for May

May’s discouraging labor data played an important role in lowering chances of a rate hike in the Federal Open Market Committee’s (FOMC) policy meeting next week. According to the Bureau of Labor Statistics (BLS), the U.S. economy created a total of only 38,000 jobs in May, significantly lower than the consensus estimate of 203,000.  Nonfarm payrolls witnessed their lowest increase since Sep 2010. The tally was also considerably lower than April’s downwardly revised job number of 123,000. Moreover, the Labor Department revised jobs additions downward for March by 22,000.

Meanwhile, the labor force participation rate fell 62.6%, as 458,000 individuals quit jobs or gave up job searches. This was primarily behind the decline in the unemployment rate to 4.7% in May, which is the lowest level since Nov 2007 and lower than the consensus estimate of 4.9% and April’s rate of 5%. 

Decreasing Prospects of June Hike

Yellen maintained a cautious tone regarding the pace of rate hikes and said that if the Fed “were to raise interest rates too steeply” and “were to contribute to a downturn,” then it would have “limited scope for responding.” Though Yellen said that most of the U.S. economic data has been encouraging following which the Fed will increase rates this year, she did not provide any clue to the timing of the hike.

Meanwhile, new threats to the economy are looming on the international horizon. Fears of Brexit have increased as Britain prepares to vote on a referendum on this issue on Jun 23. The Fed chair said: "One development that could shift investor sentiment is the upcoming referendum in the United Kingdom…A UK vote to exit the European Union could have significant economic repercussions." On Monday, Federal-funds futures – a well-known indicator of a rate hike possibility – showed that chances of a rate hike in next week’s meeting is 2%, significantly lower than 15% indicated a month ago.

Dividend Investing to Tackle Low Rates

Declining chances of a rate hike this month may have a significant impact on the financial sectors, which in turn may affect the major benchmarks. While most of the broader sectors registered healthy gains in recent times, the financial sectors are suffering in the low rate environment. Financial Select Sector SPDR Fund (XLF) and Financial Services Select Sector SPDR (XLFS) declined 0.8% and 1.1% over the past one week, respectively, while the S&P 500 posted a gain of 0.9% during the same timeframe.

A safe strategy like dividend investing may offer steady returns in the looming uncertainty. Then again, a company with consistently stronger dividend yield by virtue of regular dividend hikes is believed to be financially more stable and poised to offer steady returns over a significant timeframe. While returns from dividend payments supplement gains from rising share price, dividend income helps to limit losses incurred during a market downturn.

Separately, stocks with a strong dividend growth track record are often backed by a sustainable business model, a long track of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics.

5 Dividend Growth Stocks to Buy

Here, we have highlighted five strong dividend growth stocks that either carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). Moreover, these stocks have current dividend yield and five-year historical dividend growth rates of more than 2.2% and 30%, respectively.

With an objective to make our screening more effective, we have only considered those stocks that have a favorable VGM score. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows investors to eliminate the negative aspects of stocks and select winners. Our research shows that stocks with a VGM score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.

Luxfer Holdings PLC (LXFR - Snapshot Report) is a materials technology company specializing in the design, manufacture and supply of high-performance materials, components and gas cylinders. This Zacks Rank #1 company has a five-year historical growth rate of 33.7%. LXFR has a VGM score of A and its current dividend yield is more than 3.4%.

Sotherly Hotels Inc. (SOHO - Snapshot Report) is a real estate investment trust that focuses on the acquisition, renovation and repositioning of upscale to upper upscale full-service hotels. This Zacks Rank #2 company has a five-year historical growth rate of 43.8%. SOHO has a VGM score of A and its current dividend yield is more than 6.5%.

Himax Technologies, Inc. (HIMX - Snapshot Report) designs, develops and markets semiconductors that are critical components of flat panel displays. This Zacks Rank #2 company has a five-year historical growth rate of 34.4%. HIMX has a VGM score of B and current dividend yield of 2.8%.

Vail Resorts Inc. (MTN - Snapshot Report) is one of the leading resort operators in North America involved in operating mountain resorts and urban ski areas. This Zacks Rank #2 company has a five-year historical growth rate of 44.3%. MTN has a VGM score of B and current dividend yield of 2.4%.

The Wendy's Company (WEN - Analyst Report) is one of the world's largest quick-service hamburger companies. It has more than 6,500 franchise and company-operated restaurants throughout the globe. This Zacks Rank #2 company has a five-year historical growth rate of 31.7%. WEN has a VGM score of B and current dividend yield of 2.4%.