Be it a bull or a bear market, investors mostly love dividend paying stocks. After all, who doesn't like a steady stream of current income along with capital appreciation?
According to Josh Peters, the author of The Ultimate Dividend Playbook,"dividends may not be the only path for an individual investor's success, but if there's a better one,that is yet to be found."
But investors should note that not all dividend stocks will give them the same protection or serve the same purpose. Yes, stable, mature and profitable companies are normally known as dividend destinations. These companies are usually good for value investing and are in demand when volatility flares up.
Still, investors should note that companies consistently raising dividends appear safer options over the long term than companies offering higher payouts.
Why Does Dividend Growth Win Over Higher Payout?
Notably, companies that raise dividend regularly appear steadier than those that offer higher yields. These companies are generally ultra-strong in nature which enables them to hike dividend consistently. In a market crash, not only do these companies stand out, they also navigate volatility with ease.
On the other hand, if the Fed hikes interest rates, safer investing options such as government bonds start yielding higher. This in turn dull the lure for high dividend stocks .
Also, in most cases high-yielding stocks are not safe. These even may cut down their payout in an ensuing period, if the operating environment turns sour.
The Winning Strategy
In order to shortlist stocks that are exhibiting a dividend growth trend, we chose the following as our primary screening parameters.
5-Year Historical Dividend Growth greater than zero: This selects stocks with a solid dividend growth history.
Most Recent Payout Ratio less than M-Industry: This is the measure of dividend payment as a percentage of earnings. A relatively low payout ratio indicates the company's ability to increase dividend even during tough times.
5-Year Historical Sales Growth greater than zero: This selects stocks with a strong record of revenue growth.
5-Year Historical EPS Growth greater than zero: This parameter shortlists 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.
In addition, we place a few other criteria that lead us to some likely outperformers.
Zacks Rank Less than or Equal to 2: Stocks having a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environment.
VGM Style Score of B or better: This is simply a weighted combination of Value, Growth and Momentum.
Market Capitalization greater than $2 billion: We have eliminated small-cap stocks to ensure better flexibility and tradability.
52-Week Price Change greater than S&P 500 (Median): This ensures that the stock appreciated more than the S&P 500 over the past one year and helps us to pick some market-beating stocks.
A handful of criteria has narrowed down the universe from over 7,700 stocks to around six.
Here are the six stocks:
Tyson Foods Inc.TSN : This is a producer, processor and seller of chicken and poultry-based food products. It has a Zacks Rank #2 and a VGM score of A.
Ross Stores Inc.ROST : This runs a chain of off-price retail apparel and home accessories stores. It has a Zacks Rank #2 and a VGM score of A.
EnerSys ENS : The company is into the stored energy solutions for industrial applications. Ithas a Zacks Rank #2 and a VGM score of A.
EMCOR Group Inc.EME : The company is into the designing, operating and maintaining of mechanical and electrical systems. Italso has a Zacks Rank #2 and a VGM score of A.
Watts Water Technologies Inc.WTS : This is intodesigning, manufacturing and selling a line of products related to the water quality and water regulation. Italso has a Zacks Rank #2 and a VGM score of A.
Convergys CorporationCVG : It is into the provision of outsourced, integrated billing and customer care services, with a Zacks Rank #2 and a VGM score of A.
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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:http://www.zacks.com/performance
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