Stocks that have a strong history of dividend growth belong to mature companies 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 a dividend increase is likely in the future.
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. The 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.
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 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.
Just these few criteria narrowed down the universe from over 7,700 stocks to just seven.
Here are the five of the 13 stocks that fit the bill:
California-based NetApp provides enterprise storage as well as data management software and hardware products and services. It assists enterprises in managing multiple cloud environments, adopting next-generation technologies like artificial intelligence, Kubernetes, and contemporary databases, and navigating the complexity brought about by the quick development of data and cloud usage.
NetApp saw a positive earnings estimate revision of 27 cents for the fiscal year (ending April 2024) over the past 30 days, with an estimated earnings growth rate of 15%. NetApp currently 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.
Ohio-based Installed Building Products operates as a residential insulation installer in the United States. The company also installs complementary building products, including garage doors, rain gutters, shower doors, closet shelving and mirrors. Installed Building Products saw a solid earnings estimate of 89 cents over the past month for this year, with an estimated earnings growth rate of 14.2%.
Installed Building Products has a Zacks Rank #2 and a Growth Score of B at present.
New York-based Ralph Lauren is a major designer, marketer and distributor of premium lifestyle products in North America, Europe, Asia and internationally. It offers products in apparel, footwear, accessories, home furnishings and other licensed product categories. The company saw a solid earnings estimate revision of 8 cents over the past month for the fiscal year (ending March 2025) and has an expected earnings growth rate of 9.46%.
Ralph Lauren has a Zacks Rank #1 and a Growth Score of A.
California-based Applied Materials is one of the world’s largest suppliers of equipment for the fabrication of semiconductors, flat panel liquid crystal displays, and solar photovoltaic cells and modules. The company saw a positive earnings estimate revision of 4 cents over the past 30 days for the fiscal year (ending October 2024). It delivered an average earnings surprise of 9.4% in the last four quarters.
Applied Materials has a Zacks Rank #2 and a Growth Score of B.
Ohio-based Cardinal Health is a nationwide drug distributor and provider of services to pharmacies, healthcare providers and manufacturers. The company saw a positive earnings estimate revision of a penny over the past 30 days for the fiscal year (ending June 2024), with an expected earnings growth rate of 25.9%.
Cardinal Health presently has a Zacks Rank #2 and a Growth Score of A.
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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.
