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5 Dividend Growth Stocks to Buy for Outperformance

Wall Street has been on a stellar ride in recent weeks, with the S&P 500 on the verge of entering the bull market fueled by the big technology surge and hopes over the Fed’s rate hike pause. However, hedge funds and other speculative investors have built up their most bearish position since 2007 at the same time, making investors’ jittery.

Amid such a scenario, nothing is better than dividend investing. This is especially true as dividend stocks are major sources of consistent income for investors to create wealth when returns from the equity market are at risk even though these do not offer dramatic price appreciation. In fact, stocks with a strong history of year-over-year dividend growth form a healthy portfolio with a greater scope of capital appreciation as opposed to simple dividend-paying stocks or those that have high yields.

We have selected five dividend growth stocks — Toll Brothers TOL, Walmart Inc. WMT, W.W. Grainger Inc. GWW, Novartis NVS and Graphic Packaging Holding Company GPK — that could be compelling picks for outperformance.

Why Dividend Growth 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 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.

As a result, picking dividend growth stocks appear as winning strategies 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 13.

Here are five of the 13 stocks that fit the bill:

Pennsylvania-based Toll Brothers builds single-family detached and attached home communities, master-planned luxury residential resort-style golf communities, and urban low, mid, and high-rise communities, principally on the land it develops and improves. TOL saw solid earnings estimate revision of 12 cents over the past 7 days for the fiscal year (ending October 2023) and has an expected earnings growth rate of 1.4%

Toll Brothers has a Zacks Rank #1 and a Growth Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

Arkansas-based Walmart has evolved from being just a traditional brick-and-mortar retailer into an omnichannel player. It is engaged in the operation of retail, wholesale and other units worldwide. The company saw solid earnings estimate revision of 12 cents over the past 30 days for the fiscal year (ending January 2024) and delivered an average earnings surprise of 12.03% for the past four quarters.

Presently, WMT has a Zacks Rank #2 and a Growth Score of B.

Illinois-based W.W. Grainger is a broad-line, business-to-business distributor of maintenance, repair and operating products and services. The company saw solid earnings estimate revision of 31 cents over the past 30 days for this year and has an estimated growth rate of 19.8%.

GWW has a Zacks Rank #2 and a Growth Score of A.

Switzerland-based Novartis has one of the strongest and broadest portfolios of oncology drugs and generics, which has enabled it to maintain its dominant position as a top pharma company over the years. The company saw solid earnings estimate revision of 5 cents over the past 7 days for this year and has an estimated earnings growth rate of 10.2%.

At present, NVS has a Zacks Rank #2 (Buy) and a Growth Score of B.

Georgia-based Graphic Packaging is a leading provider of paperboard packaging solutions for a wide variety of products to food, beverage and other consumer products companies. The company has estimated earnings growth of 30% and delivered an average earnings surprise of 13.7% for the past four quarters.

Graphic Packaging has a Zacks Rank #1 and a Growth Score of B.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

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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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Novartis AG (NVS) : Free Stock Analysis Report

Walmart Inc. (WMT) : Free Stock Analysis Report

W.W. Grainger, Inc. (GWW) : Free Stock Analysis Report

Toll Brothers Inc. (TOL) : Free Stock Analysis Report

Graphic Packaging Holding Company (GPK) : Free Stock Analysis Report

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