With the bull market raging on, dividend stocks seem a better bet for 2020. This is because these products offer payouts and stability simultaneously. Investors can witness rise in current income while anticipating capital appreciation to continue irrespective of market conditions.
In particular, focusing on growth level in this strategy leads to higher returns. Stocks with a strong history of dividend growth year over year form a healthy portfolio with greater scope for 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.
Just these few criteria narrowed down the universe from over 7,700 stocks to just 14.
Here are five of the 14 stocks that fit the bill:
Oregon-based Lithia Motors Inc. LAD is one of the largest automotive retailers featuring most domestic and import franchises. The company delivered an average positive earnings surprise of 7.61% in the past four quarters and has an expected earnings growth rate of 18.5% for this year. The stock has a Zacks Rank #1 and a Growth Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Texas-based D.R. Horton, Inc. DHI is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. The stock has seen positive earnings estimate revision of a penny over the past 30 days for fiscal year (ending Sep 2020) and has an expected earnings growth rate of 14.0%. It has a Zacks Rank #2 and Growth Score of A.
California-based McGrath RentCorp MGRC operates as a business-to-business rental company in the United States and internationally. The company delivered an average positive earnings surprise of 20.21% in the past four quarters and has an expected earnings growth rate of 15.7%. The stock has a Zacks Rank #1 and Growth Score of B.
Connecticut-based SS&C Technologies Holdings Inc. SSNC delivers investment and financial management software and related services, focused exclusively on the financial services industry. The company has an estimated earnings growth rate of 27.4% for this year and delivered an average positive earnings surprise of 4.92% for the past four quarters. The stock has a Zacks Rank #2 and a Growth Score of A.
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. It has seen positive earnings estimate revision of 6 cents over the past month for this year and has an expected earnings growth rate of 24.5%. It has a Zacks Rank #2 and a 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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