Wall Street has lost momentum since the start of August, triggered by a series of bank downgrades and fears of higher rates for a longer-than-expected period. As markets navigate the typical end-of-summer lull, investors are increasingly exploring strategies that help to protect their portfolios from downside risk.

As such, investors are looking for safe and defensive bets, thus raising the appeal for dividend investing. In fact, applying some smart-beta strategies to the dividend investing world could fetch higher returns. This is because the strategy helps to capture market inefficiencies in a transparent way by adding extra metrics like volatility, revenues, earnings, momentum and other fundamental factors to the market cap or rules-based indices. And nothing seems better than picking the dividend growth strategy.

We have selected five dividend growth stocks — Caterpillar Inc. CAT, Applied Materials Inc. AMAT, Toll Brothers TOL, Walmart Inc. WMT, and Dr. Reddy’s Laboratories RDY — that could be solid choices for your portfolio.

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.

Moreover, a history of dividend growth year over year leads to a healthy portfolio with a greater scope of capital appreciation as opposed to simple dividend-paying stocks or those with high yields. 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 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 16.

Here are five of the 16 stocks that fit the bill:

Illinois-based Caterpillar is the largest global construction and mining equipment manufacturer. The company saw a solid earnings estimate revision of $1.87 over the past 30 days for this year and has an estimated growth rate of 43.1%.

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

California-based Applied Materials is one of the world’s largest suppliers of equipment for the fabrication of semiconductor, flat panel liquid crystal displays (LCDs), and solar photovoltaic (PV) cells and modules. The company saw a positive earnings estimate revision of 45 cents over the past 30 days for the fiscal year ending October 2023. It has an estimated growth rate of 1.17%.

Applied Materials has a Zacks Rank #1 and Growth Score of B.

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 98 cents over the past 30 days for the fiscal year (ending October 2023) and has an expected earnings growth rate of 16.6%

Toll Brothers has a Zacks Rank #1 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 saw a positive earnings estimate revision of 20 cents over the past 30 days for the fiscal year ending January 2024. It has an estimated growth rate of 2.07%.

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

India-based Dr. Reddy’s is an integrated global pharmaceutical company engaged in providing affordable and innovative medicines since 1984. The company saw a solid earnings estimate revision of 21 cents over the past 30 days for the fiscal year ending March 2024 and has an estimated earnings growth rate of 13.3%.

At present, RDY has a Zacks Rank #1 and a Growth Score of B.
Dr. Reddy’s Laboratories Ltd (RDY): Free Stock Analysis Report

Caterpillar Inc. (CAT): Free Stock Analysis Report

Walmart Inc. (WMT): Free Stock Analysis Report

Applied Materials, Inc. (AMAT): Free Stock Analysis Report

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

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