Stock market volatility and near-zero interest rates have been driving the appeal for dividend investing. Though the strategy doesn’t offer dramatic price appreciation, it is a major source of consistent income in the form of an increase in the payouts in any type of market.
Stocks that have a strong history of dividend growth as opposed to those that offer high yields form a healthy portfolio with more scope for capital appreciation.
Peeping Into 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.
Furthermore, these have a long history of outperformance than the broader stock market or any other dividend-paying stock over the long term. However, it does not necessarily mean that they have the highest yields.
As a result, picking stocks that offer dividend growth 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 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 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.
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 12.
Here are five of the 12 stocks that fit the bill:
Indiana-based Thor Industries Inc. THO is the largest manufacturer of recreational vehicles in the world. The company has a P/E ratio of 15.69 compared with the industry average of 21.19 and an expected earnings growth rate of 26.8% for the fiscal year (ending July 2021). The stock sports a Zacks Rank #1 and has a Growth Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
Massachusetts-based Thermo Fisher Scientific Inc. TMO is a scientific instrument maker and a world leader in serving science. The company has a P/E ratio of 27.52 compared with the industry average of 50.77 and an expected earnings growth rate of 27.8% for this year. Thermo Fisher has a Zacks Rank #2 and Growth Score of B.
Ohio-based Big Lots Inc. BIG along with its fully owned subsidiaries is a broad-line closeout retailer in the United States. The stock is expected to see earnings growth of 85.6% for the fiscal year (ending January 2021) and has a P/E ratio of 6.91 versus the industry average of 21.94. It has a Zacks Rank #2 and Growth Score of A.
Israel-based Sapiens International Corporation N.V. SPNS provides software solutions for the insurance and financial services industries in North America, Europe, the Asia Pacific and South Africa. The company has a P/E ratio of 32.04 compared with the industry average of 33.31. Its earnings are expected to grow 22.1% this year. The stock carries a Zacks Rank #2 and has a Growth Score of B.
Illinois-based Fortune Brands Home Security Inc. FBHS specializes in designing, manufacturing and selling home and security products, primarily used in kitchen and bath cabinetry, plumbing and accessories, entry door systems, and security products applications. Its earnings are expected to grow 6.1% this year. The P/E ratio stands at 22.29 compared with the industry average of 23.29. The stock has a Zacks Rank #2 and Growth Score of B.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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Big Lots, Inc. (BIG): Free Stock Analysis Report
Thor Industries, Inc. (THO): Free Stock Analysis Report
Thermo Fisher Scientific Inc. (TMO): Free Stock Analysis Report
Fortune Brands Home Security, Inc. (FBHS): Free Stock Analysis Report
Sapiens International Corporation N.V. (SPNS): Free Stock Analysis Report
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