Top 5 Dividend Stocks for Higher Returns

Investors investing in stocks primarily look for capital gains, which may not be a problem when markets are going through an uptrend. In fact, the less risky stocks including those that pay dividends, may look dull compared with riskier stocks in an up market scenario when the latter are poised to provide comparatively higher returns. However, with the lack of a clear trend in market movement, dividend stocks have lately been drawing investor attention. Dividend investing also provides an excellent opportunity for investors who give precedence to steady income over high-risk returns.

Why Dividend Investing?

The potential to provide stable returns is the key feature of dividend investing. A company with a consistently strong dividend yield is believed to be financially stable and poised to offer steady returns over a significant timeframe. On the one hand, returns from dividend payments supplement gains from rising share price; one the other hand, dividend income helps to limit losses incurred during a market downturn.

Moreover, companies with healthy dividend yields are likely to continue dividend payments as they try hard to keep impressing their investors. Plus, the popularity of dividend investing has grown over the past few years on the scope to reinvest returns from dividend payouts in additional shares of the company. Naturally, the strategy is an income-generator even in a volatile market.

How to Chose Strong Dividend Stocks?       

An impressive current-year dividend yield and a strong dividend yield history are the primary criteria for identifying strong dividend stocks. Also, earnings per share EPS growth plays an important role in such stocks as dividend is part of the company's profits that are distributed among its shareholders. So dividend paying companies with historically strong earnings performance and solid EPS estimated growth for the coming years are crucial to our strategy.

However, many of these stocks are overvalued at the current levels thanks to the significant increase in their demand over the past few years. In order to eliminate the risk of picking overvalued stocks, one should look for favorable value criteria such as low price to earnings (P/E) and PEG ratios. Moreover, the addition of favorable Zacks rank for screening stocks increases the possibility of high returns irrespective of the market environment.

Screening Parameters

• Current dividend yield & last 5-year average dividend yield greater than 2%
(Stocks with strong historical and current dividend yields are likely to provide healthy dividend income in the future.)

• Last 5-year EPS growth greater than 10% & projected 3–5 year EPS growth above 5%
(Strong EPS growth history and prospects ensure higher dividend distribution in the future.)

• Zacks Rank less than or equal to #2
(Only Strong Buy and Buy rated stocks can get through.)

• P/E ratio within 10 and 20 and less than X-industry average, PEG ratio below X-industry average
(P/E ratio of between 10 and 20, and less than that of the respective industry, and low PEG ratio indicate that the stock in undervalued)

Just these few criteria narrow down the universe of over 8,800 stocks to only 13.

Here are 5 stocks that meet these criteria:

CPT Camden Property Trust

TRV The Travelers Companies, Inc.

BANC Banc of California, Inc.

KAR KAR Auction Services, Inc.

JCI Johnson Controls Inc.

While backtesting over a two-year timeframe (Mar 14, 2014 to Mar 18, 2016), a portfolio following the strategy provided a total return of 18.8% compared with the S&P 500's return of 8.3%. Thus, this strategy may prove profitable for those looking to beat markets.

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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: http://www.zacks.com/performance.

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