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Bet on Tax Reform With These Dividend Growth Stocks

Zacks

With President Donald Trump closer to his major legislative move — the biggest tax overhaul in decades — investors have started chasing dividend growth stocks. This is because lower corporate taxes would boost companies’ profitability leading to fatty dividends and in turn benefit stocks having a history of dividend growth year over year.

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. At the same time, these offer downside protection with their consistent increase in payouts.

These stocks have superior fundamentals as opposed to their traditional dividend counterparts such as a sustainable business model, a long track record of profitability, rising cash flows, good liquidity, strong balance sheet and some value characteristics. They have a history of outperformance over the long term but not necessarily high dividend yields. All these makes dividend growth a quality and promising investment metric for the long term.

Further, a history of strong dividend growth indicates that dividend increase in the future is likely. This makes the portfolio healthy and safe. Though these stocks have a long history of outperformance compared with the broader stock market or any other dividend paying stock, it does not necessarily mean that they have the highest yields.

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 Style 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.

Here are five of the 13 stocks that fit the bill:

Jones Lang LaSalle Incorporated JLL: This Illinois-based full-service real estate firm provides management services, corporate and financial services and investment management services to corporations and other real estate owners, users and investors worldwide. The company has seen solid earnings estimate revision of 30 cents over the past 30 days for this year and has an expected earnings growth rate of 2.21%. It has a Growth Style Score of B and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Broadcom Limited AVGO: This Singapore-based company designs, develops and supplies a range of complex digital and mixed signal complementary metal oxide semiconductor-based devices and analog III-V based products worldwide. The stock saw a solid earnings estimate revision of 15 cents for the full fiscal year (ending Oct 2018) over the past 30 days and has an expected earnings growth rate of 12.12%. Broadcom has a Zacks Rank #2 and a Growth Style Score of A.

Rockwell Collins, Inc. COL: This Lowa-based company designs, produces and supports communications and aviation systems for commercial and military customers. The stock has an expected earnings growth rate of 16.73% for this fiscal year and delivered an average positive earnings surprise of 2.61% in the last four quarters. The stock has a Zacks Rank #2 and a Growth Style Score of B.

Lam Research Corporation LRCX: This California-based company designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits. It has seen positive earnings estimate revision of a couple of cents over the past 30 days for this fiscal year, with an expected earnings growth rate of 47.7%. The stock has a Zacks Rank #1 and a Growth Style Score of A.

The Home Depot Inc. HD: This Georgia-based home improvement retailer sells an assortment of building materials, home improvement products, and lawn and garden products, and provides various services. It has seen positive earnings estimate revision of six cents for this fiscal year over the past one month, with an expected earnings growth rate of 14.28%. The stock has a Zacks Rank #2 with a Growth Style Score of B.

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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: https://www.zacks.com/performance.

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