With 2016 being dominated by volatility, it’s not surprising that dividend investing has emerged as one of the most popular investing strategies. Dividends are major sources of consistent income for investors when returns from price movements of stocks are at risk.

Benefit of Dividend Growth

There are multiple styles of dividend investing out of which dividend growth is the most appealing. Stocks with dividend growth generally outperform their peers and generate increased profits year after year. Thus, the dividend growth strategy has an edge over the steady dividend strategy. By investing in stocks with dividend growth, investors can enjoy rising current income while awaiting capital appreciation.

Dividend growth stocks also provide some margin of safety, which enables investors to withstand shocks. In fact, stocks that have a strong history of dividend growth as opposed to those that have high yields form a healthy portfolio.

Moreover, these stocks often have superior fundamentals compared to other dividend paying stocks. This is because dividend growth is often an outcome of a sustainable business model, a long track record of profitability, rising cash flows, good liquidity, a strong balance sheet and some value characteristics.

Here are the screening parameters that could result in a winning dividend growth portfolio:

5-Year Historical Dividend Growth greater than zero: This selects stocks with a solid dividend growth history.

Most Recent Payout Ratio less than M-Industry: This is the measure of dividend payments as a percentage of earnings. A relatively low payout ratio indicates the company’s ability to increase dividend even during tough times.  

5-Year Historical Sales Growth greater than zero: This selects stocks with a strong record of revenue growth.

5-Year Historical EPS Growth greater than zero: This shortlists 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.

52-Week Price Change greater than S&P 500 (Median): This ensures that the stock appreciated more than the S&P 500 over the past one year.

Zacks Rank Less than or Equal to 2: Stocks having a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally perform better than their peers in all types of market environment.

VGM Style Score of B or better: This is simply a weighted combination of Value, Growth and Momentum.

Market Capitalization greater than $2 billion: We have eliminated small-cap stocks to ensure better flexibility and tradability.

Here are 5 of the 15 stocks that fit the bill:

Nu Skin Enterprises Inc. (NUS - Snapshot Report) offers a comprehensive line of premium-quality beauty and wellness products in more than 50 markets globally. Its earnings are expected to grow at a rate of 6.2% over the next 5 years. This Zacks Rank #2 company has a VGM Style Score of B.

Papa John's International Inc. (PZZA - Analyst Report) is the world’s third-largest pizza delivery company. The stock has a Zacks Rank #2 and a VGM Style Score of B. It also has an average four-quarter EPS surprise of 7.8%.

Steel Dynamics Inc. (STLD - Snapshot Report) is one of the largest steel producers and metals recyclers in the U.S. Its earnings are expected to grow at a rate of 30% over the next five years, much above the industry average of 8.9%. The stock has a Zacks Rank #2 and a VGM Style Score of A.

Masco Corporation (MAS - Analyst Report) is a leading manufacturers of branded home improvement and building products globally. The stock has delivered a positive average earnings surprise of 14.7% over the past four quarters. It has a Zacks Rank #2 and a VGM Style Score of A.

MB Financial Inc. (MBFI - Snapshot Report) is a holding company for MB Financial Bank, N.A. with assets of approximately $15.6 billion. Its earnings are expected to grow at a rate of 10.5% over the next five years. The stock has a Zacks Rank #2 and a VGM Style Score of A.