Stocks with high dividend growth and free cash flow perform best whatever the weather, Wolfe says

Published Wed, Mar 6 20242:26 PM ESTUpdated Wed, Mar 6 20243:01 PM EST

Stocks that offer high dividend growth and high free cash flow perform best no matter the economic weather, according to Wolfe Research. Although one of Wolfe's "favorite defensive strategies" is to find companies with "a virtuous combination" of both characteristics, the firm noted that the same group of stocks outperforms the rest of the market by more than five percentage points annually regardless of whether the economy is growing or in recession. Owning dividend growers with ample resources to cover those payouts is a winning strategy, analysts led by chief investment strategist Chris Senyek wrote in a report Wednesday. "Historically, this cohort of stocks has outperformed by 500+ basis points annually," he wrote. "Additionally, this combination performs very well in later cycle/recessionary environments." Here are a few stocks that fit the bill, according to Senyek: Online marketplace eBay was one of several stocks that Wolfe singled out. The company currently has a yield of 2%, with its dividend growing 14% over the past 12 months. Shares of eBay have popped 16% so far this year. They received a boost last month, adding 8%, after it raised the quarterly dividend by 2 cents and authorized an additional $2 billion in share buybacks. Despite stumbling 11% this year, UnitedHealth pays a 2% yield. The insurer has also boosted its dividend by 14% in the past year. Barclays initiated coverage of UnitedHealth with an overweight rating in a note this week. Analyst Andrew Mok believes UnitedHealth could weather challenges better than its peers, specifically in the Medicare business. "Fortunately, Medicare is a short-tailed business and plans can rebid annually. Unfortunately, bids are a competitive process dependent on the (sometimes unpredictable) actions of others," he wrote. "Simply put, there's too much uncertainty to 'look through' 2024. We think UNH is best-positioned over a multi-year period." With its 4% yield, CVS is also a good buy for investors focusing on a high-dividend growth, high free cash flow strategy, Wolfe said. The pharmacy chain and benefit manager has grown its dividend 11% over the past 12 months. Shares of CVS are down about 6% in 2024, although they rose in late February after the Rhode Island-based company's fourth-quarter revenue and adjusted earnings beat analysts' estimates. CVS lowered its full-year profit outlook at the same time. "Our guidance prudently assumes that the elevated medical cost trends we observed in the fourth quarter will carry forward into 2024," Tom Cowhey, CVS' chief financial officer, said during the earnings call. Following CVS' earnings release, investment bank Leerink initiated research coverage of the stock with an outperform rating , citing its cash potential. Other stocks Wolfe included on its list were Constellation Energy , Humana and Archer-Daniels-Midland . — CNBC's Michael Bloom contributed to this report.