Heightened volatility and uncertainty in the stock market triggered by decades-high inflation, the Russia-Ukraine conflict and Fed's aggressive tightening policy have compelled investors to search for consistent income. In this regard, nothing is better than dividend investing. Although the strategy doesn't offer dramatic price appreciation, it is a major source of consistent income for investors in any type of market.
While there are several dividend stocks, honing in on those with a history of dividend growth leads to a healthy portfolio, with greater scope of capital appreciation as opposed to simple dividend-paying stocks or those with high yields. We have selected five dividend growth stocks — Group 1 Automotive GPI, Westlake Chemical Corporation WLK, Everest Re Group Ltd RE, ArcBest Corporation ARCB and Campbell Soup Company CPB — that could be compelling picks for the second half.
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 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 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 one 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 26.
Here are five of the 26 stocks that fit the bill:
Texas-based Group 1 Automotive is one of the leading automotive retailers in the world, with operations primarily located in the United States and the UK. The company has an estimated earnings growth rate of 23% for this year and delivered an average earnings surprise of 6.63% for the past four quarters.
Group 1 Automotive has a Zacks Rank #1 and Growth Score of A.
Texas-based Westlake Chemical is a global producer and supplier of materials and innovative products. It has seen negative earnings estimate revision of 50 cents for this year over the past month and has an expected earnings growth rate of 44%.
Westlake Chemical has a Zacks Rank #2 and Growth Score of A.
Bermuda-based Everest Re writes property and casualty, reinsurance and insurance in the United States, Bermuda and international markets. The company saw solid earnings estimate revision of 53 cents over the past 30 days for this year and has an estimated earnings growth rate of 20.1%.
Everest Re carries a Zacks Rank #2 and Growth Score of A.
Arkansas-based ArcBest provides freight transportation services and integrated logistics solutions worldwide. The company saw positive earnings estimate revision of 4 cents over the past 30 days for this year and has an estimated earnings growth rate of 59.4%.
ArcBest has a Zacks Rank #2 and Growth Score of B.
New Jersey-based Campbell Soup is a global manufacturer and marketer of high-quality, branded, convenience food products. The company saw positive earnings estimate revision of a penny over the past 30 days for fiscal year (ending July 2022) and delivered an average earnings surprise of 10.78% for the past four quarters.
Campbell Soup has a Zacks Rank #2 and a Growth Score of B.
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.
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