In volatile markets, investors look for both growth and income in their portfolios. This can be achieved by zeroing in on companies that not only pay dividends but also have been consistently increasing their payout.  

Why Dividend Growth?

Stocks that have a history of enhancing shareholder returns through consistent dividend hikes make an investor’s portfolio immune to large swings in stock prices in turbulent times, and thus act as a hedge against economic or political uncertainty. Simultaneously, these offer outsized payouts or sizable yields on a regular basis irrespective of the market direction.

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.

Moreover, a history of dividend growth year over year leads to a healthy portfolio with greater scope of capital appreciation as opposed to simple dividend paying stocks or those with high yields. 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.