These dividend growers are on solid footing as volatility, inflation pick up

Published Sat, May 22 20218:05 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

With market volatility picking up and inflation expectations rising, many investors have an urge to find stocks with growing dividends that can shore up their portfolios. However, not all dividends are created equal, and investors should be careful to look for companies with solid underlying financials, according to Wall Street pros. "The financial health of a company, what our research shows, does a better job of giving us confidence that the dividend is well covered and that the company can grow that dividend over time than looking at cash dividend payments, how long a company's paid a dividend, how often they grow those dividends," said Christopher Huemmer, a senior investment strategist at FlexShares. His firm's Quality Dividend Index Fund has gained more than 13% so far this year. Some of the metrics of financial health that Hummer uses include cash flow and profit margins relative to peers. One way to start a screen for financially healthy companies is to filter for debt levels to find firms with room for more dividend hikes and manageable interest costs The stocks below have a dividend yield of 2% or greater and have hiked their payouts in at least four out the past five years, according to data from FactSet. The companies also have a total debt-to-capital ratio of 60% or lower, as well as a market cap of at least $20 billion. The list has a heavy representation from energy stocks and mid-sized financials. Both sectors could be particularly interesting for investors worried about inflation, as rising interest rates tend to boost the bottom lines of bank's while rising gas prices can signal stronger cash flow for energy producers. The price of oil has surged back above $60 per barrel this year as economies around the world have reopened from the pandemic, easing some concerns around the health of energy companies. Valero and Canadian Natural Resources are two of the top stocks on the list in terms of dividend yield at 5.1% and 4.0%, respectively. Each has a debt-to-capital ratio of under 50%, as well. Among financials, insurer Prudential and regional bank Citizen's Financials have the top yields on the list at 4.2% and 3.2%, respectively. The two have increased their dividends in each of the last five years, according to FactSet. The biggest company by market cap on the list is Texas Instruments at more at more than $160 billion. The stock sports a dividend yield of more than 2% and is also a top-10 holding of the FlexShares Quality Dividend Index Fund . The chipmaker's shares have gained more than 12% year to date.

Rich Templeton, President and CEO of Texas Instruments Inc.

Namas Bhojani | Bloomberg | Getty Images

With market volatility picking up and inflation expectations rising, many investors have an urge to find stocks with growing dividends that can shore up their portfolios.

However, not all dividends are created equal, and investors should be careful to look for companies with solid underlying financials, according to Wall Street pros.

"The financial health of a company, what our research shows, does a better job of giving us confidence that the dividend is well covered and that the company can grow that dividend over time than looking at cash dividend payments, how long a company's paid a dividend, how often they grow those dividends," said Christopher Huemmer, a senior investment strategist at FlexShares.