Volatility and uncertainty in the stock market have taken the front seat in recent weeks on worries over higher interest rates for longer time. In such a scenario, dividend investing seems to be a prudent option to fight the current market turmoil. Though dividend-paying stocks don’t offer dramatic price appreciation, they 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 dividend growth year over year 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 — Applied Materials Inc. AMAT, PulteGroup Inc. PHM, Arcos Dorados Holdings Inc. ARCO, McKesson Corporation MCK and NetEase Inc. NTES — that could be compelling picks for investors.

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 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.

P/E Ratio Less than X-Industry: A ratio less than X-industry indicates that the stock is cheap and undervalued in that industry.

Just these few criteria narrowed down the universe from over 7,700 stocks to just 12.

Here are five of the 12 stocks that fit the bill:

California-based Applied Materials is one of the world’s largest suppliers of equipment for the fabrication of semiconductors, flat panel liquid crystal displays (LCDs), and solar photovoltaic (PV) cells and modules. The company has a P/E ratio of 17.29 compared with the industry average of 22.12. It has an estimated growth rate of 2.60% for the fiscal year (ending October 2023).

Applied Materials 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 has a P/E ratio of 6.36 compared with the industry average of 8.15. Its earnings are estimated to grow 7.6% for this year.

PulteGroup carries a Zacks Rank #2 and has a Growth Score of B.

Argentina-based Arcos Dorados operates as a franchisee of McDonald’s, with its operations divided in Brazil, North Latin America, South Latin America and the Caribbean divisions. It also runs quick-service restaurants in Latin America and the Caribbean. Arcos Dorados has a P/E ratio of 12.17 compared with the industry average of 20.73 and has an estimated earnings growth rate of 13%.

Arcos Dorados has a Zacks Rank #1 and a Growth Score of A.

California-based McKesson is a healthcare services and information technology company. The stock has an expected earnings growth rate of 4.2% for the fiscal year (ending March 2024). It has a P/E ratio of 16.51 compared with the industry average of 21.81.

McKesson has a Zacks Rank #2 and a Growth Score of B.

Beijing-based NetEase is an Internet technology company engaged in the development of applications, services and other technologies in China. It has an estimated earnings growth rate of 30.3% for this year and has a P/E ratio of 15.43 compared with the industry average of 23.08.

NetEase has a Zacks Rank #2 and a Growth Score of B.
McKesson Corporation (MCK): Free Stock Analysis Report

PulteGroup, Inc. (PHM): Free Stock Analysis Report

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

NetEase, Inc. (NTES): Free Stock Analysis Report

Arcos Dorados Holdings Inc. (ARCO): Free Stock Analysis Report

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