Buy These 3 High-Quality Momentum Stocks Now for Dividends and Growth

NEW YORK (TheStreet) -- Momentum stocks have historically outperformed the market. The momentum effect has been well documented since Jegadeesh and Titman's 2001 research paper Momentum. Investing in stocks that have done well over the last six-to-12 months often leads to continued out-performance.

Why is this? The leading theory is that investors don't react quickly enough to information. When positive information comes out about a company, we don't immediately bid the company's share price up to its appropriate level. Instead, the share price rises over a longer period.

This article covers three timely dividend stocks with high six-month momentum. These stocks are all very different. One is a discount retailer, one is a specialty restaurant, and one is a well-known drug store. 

Dividend Momentum Stock No. 1 -- Target (TGT)

Target stock gained 30% over the last six months. The S&P 500 gained 4.1% in the same time period. The good news for the company started in November of 2014 when target released its third quarter earnings. The company had previously expected adjusted earnings-per-share of $0.40-to-$0.50. Target delivered adjusted earnings-per-share of $0.54 -- significantly beating its high end expectations. Strong growth in the company's third quarter of 2014 was a result of better-than-expected digital sales, which grew about 30% year-over-year.

Good news for Target shareholders continued on January 15th, when the company announced it would discontinue its floundering Canadian operations. Target's attempt to expand into Canada was botched from the beginning. The company continually lost money and failed to gain traction in Canada. The company's best projections showed it would not reach profitability in the country until at least 2021. Target's management made the right decision for shareholders by admitting its mistake and beginning the liquidation process of the company's Canadian stores. This frees up more cash for dividends, share repurchases, and growth in the company's profitable United States operations.

Target delivered more good news to investors on February 25th, when it released its fourth quarter earnings. The company once again exceeded its own guidance. Target projected adjusted earnings-per-share of$1.43-to-$1.47 in the fourth quarter of 2014, but delivered adjusted earnings-per-share of $1.50.

Target's next earnings release comes out May 20th. The company is expecting adjusted earnings-per-share of $0.95-to-$1.05 for its next quarterly release. Based on the company's current momentum and recent outperformance, adjusted earnings-per-share may very well come in higher than expected. If they do, the stock's momentum will likely continue surging forward.

Target currently has a dividend yield of 2.6%. The company has increased its dividend payments for 47 consecutive years, making it one of only 53 Dividend Aristocrats. The stock currently has strong momentum, driven by positive financial news and a very long history of rewarding shareholders with rising dividends.

Dividend Momentum Stock No. 2 - Walgreens Boots Alliance (WBA)

Walgreens Boots Alliance stock has gained 29.1% over the last six months versus 4.1% for the S&P 500. Like Target, Walgreens Boots Alliance is a Dividend Aristocrat. The company has raised its dividend payments for 39 consecutive years. The company currently has a dividend yield of 1.6%.

Walgreens Boots Alliance has been busy. On December 23rd 2014, the company released fiscal 2015 first quarter results. The company saw adjusted earnings-per-share grow 12.5% versus the same quarter a year ago. The company realized strong comparable store sales growth of 5.7% versus the same quarter last year.

Walgreen's officially became Walgreens Boots Alliance on December 31st 2014 when it completed its merger with Alliance Boots. The merger joins the largest drugstore chain in the United States (Walgreen's) with the market leader in European retail pharmacy (Boots) and the leading international distributor-wholesaler (Alliance Healthcare). The merger opens the door for new synergies and potential cost efficiencies that will likely boost earnings-per-share growth for years.

Walgreens Boots Alliance's second quarter 2015 results were released April 9th. The company saw adjusted earnings-per-share grow 21.6% versus the same quarter a year ago. Strong second quarter results built on great first quarter results. Fiscal 2015 is shaping up to be a very profitable year for the company's shareholders.

Walgreens Boots Alliance is projecting adjusted earnings-per-share of $3.45 to $3.65 in fiscal 2015, and $4.25 to $4.60 for fiscal 2016. At current prices, this translates to a 2016 forward earnings price-to-earnings ratio of 18.3 to 19.8. While not cheap, Walgreens Boots Alliance is projecting rapid growth in the coming year. The stock's momentum will likely carry it to new highs, especially if next quarter's earnings show continued growth.

Dividend Momentum Stock No. 3 - Starbucks (SBUX)

Starbucks is the global leader in ready-to-drink coffee. The company has grown to a market cap of over $73 billion thanks to its strong brand and focus on quality. Starbucks currently has a dividend yield of 2.6%. The company's stock has gained 30% over the last six months, versus just 4.1% for the S&P 500.

Like the two companies above, excellent operating results are driving share price momentum. In the first quarter of fiscal 2015, Starbucks released adjusted earnings-per-share of $0.40, 17.6% higher than the same quarter a year ago. In the second quarter of fiscal 2015, Starbucks again showed double-digit growth. The company saw adjusted earnings-per-share grow 17.9% in the second quarter of fiscal 2015 versus the same quarter last year.

For full fiscal 2015, Starbucks is projecting adjusted earnings-per-share of $1.55-to-$1.57 versus adjusted earnings-per-share of $1.33 in fiscal 2014. This comes to a growth rate over 17%. The company showed 21% earnings-per-share growth in 2014, and 22% earnings-per-share growth in 2013.

Starbucks' hyper-caffeinated growth comes from several areas: New store openings, international expansion, Teavana expansion, and better food options. The company is placing a special emphasis on food as it tries to gain more share of the fast-food breakfast market and break into lunch and dinner as well. Starbucks has been able to compound its earnings-per-share at a rapid clip because it sells an addictive product (caffeine, milk fat, and sugar) with a strong brand. The company's momentum will likely continue as long as top and bottom line growth continue. With demand increasing for the company's products, investors can expect continued growth.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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