Dividend-paying securities are a major source of consistent income for investors to create wealth when returns from the equity market are at risk. This is because investors can enjoy rising current income while anticipating capital appreciation irrespective of market conditions.
Additionally, stocks with a strong history of dividend growth year over year form a healthy portfolio with a greater scope of capital appreciation as opposed to simple dividend-paying stocks or those that have high yields.
Why Dividend Growth Investing Is Better?
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 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 appears 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 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.
P/E Ratio Less than X-Industry: A ratio less than X-industry indicates that the stock is cheap and undervalued in that industry.
Just these few criteria narrowed down the universe from over 7,700 stocks to just 17.
Here are five of the 17 stocks that fit the bill:
California-based SYNNEX Corporation SNX is a business process services company providing business-to-business services to customers and business partners. The company has a P/E ratio of 9.39 compared with the industry average of 35.10 and delivered earnings surprises in the past four quarters, with an average beat of 9.13%. It has a Zacks Rank #1 and Growth Score of A.
Massachusetts-based Thermo Fisher Scientific Inc. TMO is a provider of analytical instruments, equipment, reagents and consumables, software, and services for research, manufacturing, analysis, discovery, and diagnostics worldwide. The company has a P/E ratio of 24.64 compared with the industry average of 32.03 and an expected earnings growth rate of 10.79% for this year. Thermo Fisher has a Zacks Rank #2 and Growth Score of B.
Illinois-based The Allstate Corporation ALL is the third-largest property-casualty (P&C) insurer and the largest publicly held personal lines carrier in the United States. The stock is expected to see earnings growth of 23.30% for this year and has a P/E ratio of 10.65 versus the industry average of 15.16. It has a Zacks Rank #2 and Growth Score of B.
California-based Intel INTC is the world’s largest manufacturer of semiconductor products. The company has a P/E ratio of 12.26 compared with the industry average of 21.33 and delivered an average positive earnings surprise of 10.21% in the past four quarters. It sports a Zacks Rank #2 and has a Growth Score of B.
Minnesota-based Target Corporation TGT operates large-format general merchandise and food discount stores in the United States, which include Target and SuperTarget. Its earnings are expected to grow 14.10% for fiscal year (January 2020) while its P/E ratio stands at 17.52 compared with the industry average of 23.21. The stock carries a Zacks Rank #2 and has a Growth Score of A.