Volatility has rattled stock markets in recent months. The Fed’s rate hike action, a series of bank failures in the United States, growing geopolitical tensions and recession fears have compelled investors to look for safe and defensive bets, thus 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 — Insperity Inc. NSP, Microchip Technology Incorporated MCHP, Darden Restaurants Inc. DRI, Dr. Reddys Laboratories RDY and W.W. Grainger Inc. GWW — that could be compelling picks amid market volatility.
Why Dividend Growth?
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 22.
Here are five of the 22 stocks that fit the bill:
Texas-based Insperity provides an array of human resources and business solutions designed to improve business performance. The company has an estimated earnings growth rate of 1.1% for this year and delivered an average earnings surprise of 22.2% for the past four quarters.
Insperity 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.
Arizona-based Microchip Technology is engaged in developing and manufacturing microcontrollers, memory and analog and interface products for embedded control systems, which are small, low-power computers designed to perform specific tasks. The company has an estimated earnings growth rate of 2.7% for the fiscal year (ending March 2024) and delivered an average earnings surprise of 3.07% for the past four quarters.
Microchip Technology has a Zacks Rank #2 and a Growth Score of A.
Florida-based Darden Restaurants is one of the largest casual dining restaurant operators worldwide. The company saw a solid earnings estimate revision of 8 cents over the past 30 days for the fiscal year (ending May 2023), with estimated earnings growth of 7.2%.
Darden Restaurants has a Zacks Rank #2 and a Growth Score of A.
India-based Dr. Reddy’s Laboratories is an integrated global pharmaceutical company engaged in providing affordable and innovative medicines since 1984. The company has an estimated earnings growth of 5.2% for the fiscal year (ending March 2024) and delivered an earnings surprise of 48.61% over the last four quarters.
At present, RDY has a Zacks Rank #2 and a Growth Score of A.
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 12.2% and delivered an average earnings surprise of 9.81% for the past four quarters.
GWW 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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