So far this year, the S&P 500 is down by 8.5%, while the Nasdaq and Russell 2000 are down even more with losses of 14.6% and 11.9%, respectively. Initially, stocks sold off due to a Fed and inflation which turned out to be more “sticky” rather than “transitory”.

Another bearish catalyst emerged with Russia’s invasion of Ukraine. Of course, this also fed into inflation fears given that Russia is a larger exporter of energy, metals, and agricultural commodities like wheat. Not to mention the elevated tail risk of a confrontation that escalates in terms of more countries getting involved and more lethal weapons being deployed. Thus, it’s understandable that investor sentiment has plummeted. 

Historically, the best times to invest are during these periods of fear, doubt, and uncertainty. This is when the opportunity emerges to buy high-quality stocks at a discount to their intrinsic value. One characteristic of a high-quality stock is a consistent track record of hiking dividends. This indicates a strong business that can thrive in all types of economic conditions, and a management team focused on returning capital to shareholders. Here are 3 such ‘dividend growth’ stocks that investors should consider: Microsoft (MSFT), Costco (COST), and AbbVie (ABBV). 

Microsoft (MSFT) 

MSFT is one of the leading companies in the software, enterprise software, and cloud computing markets. It also sells PCs, tablets, gaming and entertainment consoles, other intelligent devices, and related accessories through a variety of sales channels including direct to consumers. OEMs, distributors, resellers, digital marketplaces, and retail stores.

Currently, Microsoft pays $2.48 per share in annual dividends which equates to 0.8%. This is significantly less than many other companies, however, it’s had a streak of increasing its payout by more than 10% over the last 3 years. Over the last decade, the company has increased its payout by 259%. Management has also been rewarding shareholders through buybacks which lift EPS.

Further, unlike other dividend stocks, MSFT continues to grow revenues and earnings by an impressive amount. Not surprisingly, MSFT has been one of the best-performing stocks over the last decade as it successfully pivoted its business model to being cloud-focused and subscription-based. It’s also unique in that it’s growing organically and through acquisitions.

2 of its latest moves were the purchase of Nuance Communications and Activision Blizzard. Nuance is a leader in conversational AI and ambient intelligence with use cases across healthcare, financial services, retail, and telecommunications industries. ATVI is one of the top video game publishers in the world and has many popular games like Call of Duty and World of Warcraft.

MSFT’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a B for Quality due to its leadership in many large markets and a track record of growth and execution. It also has a B for Sentiment as 22 out of 23 analysts covering the stock have a Buy rating with a consensus price target of $363, implying a 31% upside.  Click here to see the complete POWR ratings for MSFT including Growth, Value, and Momentum. 

(Note that MSFT is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.)

Costco (COST)

COST operates membership warehouses in the U.S., Canada, Puerto Rico, the United Kingdom, Mexico, Australia, China, Japan, and other countries together with its subsidiaries. It offers branded and private-label products in a wide range of merchandise categories and operates more than 816 warehouses.

Like MSFT, COST isn’t really considered a ‘dividend’ stock, because its payout is relatively low. However, it has all the signs of becoming a major dividend stock in the future based on the steady, compounding growth of its payouts. Over the last decade, its dividend payout went from $0.89 per share to $12.97 per share which equates to a 1,357% increase. Over the last 5 years, its dividends have increased by a 12% annual rate.

The company’s recent financial performance has been quite strong, indicating that this trend is nowhere near exhausted. In its last quarter, it had 16.6% revenue growth and an 18.4% increase in operating income. Clearly, COST’s positive momentum during the pandemic has continued as value-conscious buyers are increasingly buying in bulk to maximize their purchasing power during this inflationary period. 

COST has an overall B rating, which translates to Buy in our POWR Ratings system. It has a B for Stability due to its track record of growing sales, earnings, and dividends. In terms of Industry grade, COST is a member of the A-rated Grocery/Big Box Retailers which has been a beneficiary of inflation. Click here to see COST’s complete POWR ratings including grades for Momentum, Sentiment, Growth, Value, and Quality.

AbbVie (ABBV)

ABBV is a research-based biopharmaceutical company that is engaged in the research and development, manufacturing, commercialization, and sale of medicines and therapies. ABBV offers its products in various therapeutic categories, including immunology, oncology, aesthetics, neuroscience, and more.

Healthcare stocks are a great sector to find dividend and dividend growth stocks, because they tend to have stable, growing revenues as healthcare spending has grown at a faster rate than the economy since the 1950s. Two main factors are the aging population and increasing government spending on healthcare services.

ABBV only started paying a dividend in 2013. Since then, it’s hiked every single year and currently pays $5.25 per share which equates to an average annual increase of 28%. Given that ABBV has several strong drugs, a well-regarded pipeline, and the track record of successfully developing new treatments and bringing them to market, this trend of dividend hikes should continue. 

Its last earnings report shows strong momentum as well with 7.4% revenue growth and operating income increasing by 35%. Wall Street analysts are forecasting 6% revenue growth for Q1 and an 8% increase in EPS which makes the stock quite appealing with a forward P/E of 12.9. 

These positives are reflected in ABBV’s POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our rating system. In terms of its component grades, ABBV has a B for Value and Quality. This is consistent with its low P/E, 3.6% dividend yield, and expectations of continued dividend growth. In addition to the component grades highlighted, click here to see ABBV’s full POWR Ratings. 

MSFT shares fell $1.53 (-0.51%) in premarket trading Monday. Year-to-date, MSFT has declined -11.00%, versus a -6.48% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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