Worries over debt default have been making investors jittery, raising the appeal for 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 — W.W. Grainger Inc. GWW, Graphic Packaging Holding Company GPK, PulteGroup Inc. PHM, Walmart Inc. WMT and Novartis NVS — that could be solid choices for your portfolio.
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 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 11.
Here are five of the 11 stocks that fit the bill:
Illinois-based W.W. Grainger is a broad-line, business-to-business distributor of maintenance, repair and operating products and services. The company has an estimated growth rate of 19.8% and delivered an average earnings surprise of 9.15% for the past four quarters.
GWW 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.
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 saw a solid earnings estimate revision of 28 cents over the past 30 days for this year, with estimated growth of 30%.
Graphic Packaging has a Zacks Rank #1 and a Growth Score of B.
Atlanta-based PulteGroup is engaged in homebuilding and financial services businesses, primarily in the United States. The company saw a solid earnings estimate revision of $1.61 over the past 30 days for this year and delivered an average earnings surprise of 15.60% over the past four quarters.
PulteGroup carries a Zacks Rank #1 and has a Growth Score of B.
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 has an estimated earnings growth rate of 7.7% for the fiscal year (ending January 2024) and delivered an average earnings surprise of 3.83% for the past four quarters.
Presently, WMT 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 has an estimated growth rate of 9.3% and delivered an average earnings surprise of 5.15% for the past four quarters.
At present, NVS has a Zacks Rank #2 (Buy) 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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