Investing

5 Dividend Growth Stocks for Steady Returns in Uncertain Times

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Wall Street has been shaky in recent weeks due to a weakening Chinese economy and fears of higher rates for a longer-than-expected period. Against such a backdrop, investors are increasingly exploring strategies that will help them to protect their portfolios from downside risk. And nothing seems better than the strategy of dividend investing.

Picking stocks with a history of dividend growth leads to a healthy portfolio with a greater scope of capital appreciation as opposed to simple dividend-paying stocks or those with high yields. We have selected five dividend growth stocks — Caterpillar Inc. CAT, KB Home KBH, Walmart Inc. WMT, Dr. Reddy’s Laboratories RDY and FedEx Corporation FDX — that could be solid choices amid market volatility.

Peeping Into the 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 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 21 cents over the past 30 days for this year and has an estimated growth rate of 43.2%.

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

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 14 cents over the past 60 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 #2 and a Growth Score of A.

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 19 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 Laboratories is an integrated global pharmaceutical company engaged in providing affordable and innovative medicines since 1984. The company saw a solid earnings estimate revision of 5 cents over the past seven days for the fiscal year ending March 2024. It has an estimated earnings growth rate of 14.85%.

At present, RDY has a Zacks Rank #1 and a Growth Score of B.

Tennessee-based FedEx is the leader in global express delivery services. It provides a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managing collaboratively under the FedEx brand. FedEx has seen upward earnings estimate revision of 7 cents over the past seven days for the fiscal year (ending May 2024) and has an estimated earnings growth rate of 16.1%.

FDX has a Zacks Rank #2 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

FedEx Corporation (FDX): Free Stock Analysis Report

KB Home (KBH): Free Stock Analysis Report

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Zacks Investment Research

This article originally appeared on Zacks

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