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5 Top Dividend Growth Stocks to Counter Volatility

With volatility back on the stock market due to uncertainty over the timing of Fed rate cuts and increased geopolitical tension, the appeal for dividend investing has risen. The strategy focuses on companies that not only pay dividends but also consistently increase them over time. This approach offers a unique blend of income and growth, appealing to a broad range of investors. Additionally, it can provide a sense of security in times of market uncertainty or downturns, as dividend-paying stocks can reduce the volatility of a portfolio and tend to outperform in a choppy market.

Stocks with a strong history of year-over-year dividend growth form a healthy portfolio with a greater scope of capital appreciation, as opposed to simple dividend-paying stocks or those that have high yields. We have selected five dividend growth stocks — NetApp NTAP, Caterpillar Inc. CAT, Dick's Sporting Goods Inc. DKS, KB Home KBH and Applied Materials Inc. AMAT — that could be solid choices for your portfolio amid volatility.

Dividend Growth: A Winning 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 more than 7,700 stocks to just 11.

Here are five of the 11 stocks that fit the bill:

California-based NetApp provides enterprise storage as well as data management software and hardware products and services. It assists enterprises in managing multiple cloud environments, adopting next-generation technologies like artificial intelligence, Kubernetes, and contemporary databases, and navigating the complexity brought about by the quick development of data and cloud usage.

NetApp saw a positive earnings estimate revision of 4 cents for the fiscal year (ending April 2024) over the past 30 days, with an estimated earnings growth rate of 15.7%. NetApp currently sports a Zacks Rank #1 and has a Growth Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

Illinois-based Caterpillar, known for its iconic yellow machines, is the largest global construction and mining equipment manufacturer. The company saw a solid earnings estimate revision of 10 cents over the past 30 days for this year and has an estimated growth rate of 0.6%.

Caterpillar has a Zacks Rank #2 and a Growth Score of B.

Pennsylvania-based Dick's Sporting Goods operates as a major omni-channel sporting goods retailer, offering athletic shoes, apparel, accessories and a broad selection of outdoor and athletic equipment for team sports, fitness, camping, fishing, tennis, golf, water sports, etc. The company saw a solid earnings estimate revision of 25 cents over the past 30 days for the fiscal year (ending January 2025) and has an estimated earnings growth rate of 2.94%.

Dick's Sporting Goods has a Zacks Rank #2 and a Growth Score of A.

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 42 cents over the past 30 days for the fiscal year (ending November 2024) and has an estimated earnings growth rate of 13.94%.

KB Home has a Zacks Rank #1 and a Growth Score of A.

California-based Applied Materials is one of the world’s largest suppliers of equipment for the fabrication of semiconductors, flat panel liquid crystal displays, and solar photovoltaic cells and modules. The company delivered an average earnings surprise of 9.43% for the last four quarters.

Applied Materials has a Zacks Rank #2 and a Growth Score of B.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

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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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Caterpillar Inc. (CAT) : Free Stock Analysis Report

NetApp, Inc. (NTAP) : Free Stock Analysis Report

DICK'S Sporting Goods, Inc. (DKS) : Free Stock Analysis Report

Applied Materials, Inc. (AMAT) : Free Stock Analysis Report

KB Home (KBH) : Free Stock Analysis Report

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