Wolfe Research says these ‘virtuous’ stocks with high dividend growth and strong cash flow are ready for outperformance.

Persistent inflation and uncertainty surrounding the Federal Reserve’s next move on interest rates are causing challenges for equity markets. However, recent comments from the central bank suggesting that a rate hike is not imminent, along with better-than-expected first-quarter earnings reports and soft labor market data, have helped boost investor optimism. In this environment, Wolfe Research has identified a list of stocks that could potentially help investors navigate the current macroeconomic conditions.

One of Wolfe Research’s preferred dividend strategies is to invest in companies with a combination of high dividend growth and a high free cash flow yield. Historically, this collection of stocks has outperformed the broader market by approximately 500 basis points annually. Johnson & Johnson, for example, is one of the companies that meets these criteria. While its stock has declined more than 4% in 2024, its dividends have grown by 58% over the past year, outperforming Wall Street earnings estimates in its latest quarter.

HP Inc. is another company on Wolfe Research’s list, with shares down 1.2% in 2024. The personal computer company has seen its dividend increase by 5% in the last year, and has a 2024 full-year free cash flow yield of 9%. HP Inc. is set to announce its fiscal second-quarter results on May 29, with CEO Enrique Lores noting significant tailwinds that could drive demand for PCs, including artificial intelligence.

Constellation Energy, which has seen its stock rise more than 85% in 2024, has also doubled its dividends over the past year. The electric power and natural gas provider exceeded earnings expectations recently and reaffirmed its full-year guidance from December. With plans to increase nuclear power generation in the U.S., Constellation Energy is positioned as a key player in meeting growing electricity demand in the future.

Other companies highlighted by Wolfe Research include eBay and Vistra Energy, both of which could offer potential opportunities for investors in the current market environment. As uncertainty persists surrounding inflation and interest rates, careful selection of stocks with strong dividend growth and free cash flow yields could provide a buffer against market headwinds. By focusing on companies with solid financial fundamentals and growth potential, investors may be better positioned to navigate the challenges ahead and capitalize on opportunities in the equity markets.