Dividend investing is in demand once again, given the uncertainties around the Fed’s future actions Though dividend-paying stocks don’t offer dramatic price appreciation, they can provide a consistent income stream. In particular, focusing on the growth level in this strategy leads to higher returns.
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 — KB Home KBH, Caterpillar Inc. CAT, Walmart Inc. WMT, HCA Healthcare Inc. HCA and Monolithic Power Systems MPWR — that could be compelling picks for investors.
Inside 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 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 revenue.
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 14.
Here are five of the 14 stocks that fit the bill:
California-based KB Home is a well-known homebuilder in the United States and one of the largest in the state. The company saw a solid earnings estimate revision of 67 cents over the past 30 days for the fiscal year (ending November 2023). It delivered an average earnings surprise of 20.66% for the past four quarters.
KB Home 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.
Illinois-based Caterpillar is the largest global construction and mining equipment manufacturer. The company saw a solid earnings estimate revision of 11 cents over the past 30 days for this year and has an estimated growth rate of 29.1%.
Caterpillar has a Zacks Rank #2 and 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 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.
Tennessee-based HCA Healthcare is the largest non-governmental operator of acute care hospitals in the United States. The company has an estimated earnings growth rate of 7.2% for this year and delivered an average earnings surprise of 9.04% for the past four quarters.
HCA Healthcare has a Zacks Rank #2 and a Growth Score of B.
Washington-based Monolithic Power designs, develops and markets high-performance power solutions. The company focuses on the market for high-performance analog and mixed-signal integrated circuits. MPWR saw a positive earnings estimate revision of 5 cents over the past 30 days for this year and has delivered an average earnings surprise of 3.33% for the past four quarters.
Monolithic Power has a Zacks Rank #2 and a Growth Score of B.
Caterpillar Inc. (CAT): Free Stock Analysis Report
Walmart Inc. (WMT): Free Stock Analysis Report
KB Home (KBH): Free Stock Analysis Report
Monolithic Power Systems, Inc. (MPWR): Free Stock Analysis Report
HCA Healthcare, Inc. (HCA): Free Stock Analysis Report
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