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5 Blue-Chip Stocks Ready to Boost Dividends - views
BALTIMORE (Stockpickr) -- These five blue-chip stocks are getting ready to raise dividends. They just don’t know it yet.
It doesn’t take a professional market technician to notice that volatility is getting dumped back into the markets in June. The VIX Volatility Index spiked to its highest point this year on the big price swings that Mr. Market’s been struggling through, and that’s left investors wondering if now’s a good time to have exposure to stocks. But there’s a way to shed some of that volatility right now: look to get some of your returns in cold, hard cash.
The biggest, most stable companies are paying out bigger dividends than ever right now, so investors looking to earn part of their annual returns in cash are getting some stability versus the broad market right now. Getting cash dividends is great, but finding stocks that can continually pay you bigger dividends is even better.
That’s why we’re searching out a handful of blue-chip names that I think are set to hike their dividend payouts in the next quarter.
For our purposes, our "crystal ball" is composed of a few factors: namely a solid balance sheet, a low payout ratio and a history of dividend hikes. While those items don't guarantee dividend announcements in the next month or two, they do dramatically increase the odds that management will hike their cash payouts, especially as investors start to get antsy about stock performance in 2012.
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In other words, fundamentally solid companies realize that they need to hike returns for shareholders if they want to keep demand for their stock high. And studies show that, historically, a dividend-centric strategy from management means much bigger returns for your portfolio.
Without further ado, here's a look at five blue chip stocks that could be about to increase their dividend payments in the next quarter.
First up is communications utility Verizon (VZ), a $121 billion firm that owns the biggest landline network in the country, half of Verizon Wireless, and a super high-speed residential fiber optic network in FiOS. All of those businesses give Verizon a suite of complementary services that it’s able to cross-sell to its massive customer Rolodex, and churn out attractive margins at the bottom line.
Verizon’s sheer size is a major advantage. Because the firm had the capital required to finance a massive infrastructure project in FiOS, it was able to build the fastest data network available to consumers, one that shouldn’t be usurped any time soom. Even though Verizon is winding down its installations (because of the cost, in many cases), the high revenue per user VZ is currently commanding should start to eat away at the massive investment that the firm has already made.
Verizon’s wireless business is the big variable that the firm needs to figure out. Vodafone (VOD) owns close to half the business, and Verizon wants to buy it. That would be a good use of some of VZ’s balance sheet liquidity in the near-term.
From a financial standpoint, Verizon is in solid shape, having reduced its total debt by unloading non-core businesses in the last decade. That, and the mountains of cash thrown off by Verizon’s operations, has helped push this firm’s quarterly dividend payout to 50 cents per share; that’s a 4.7% yield at current price levels.
With four straight quarters of payouts at that level (counting last week’s dividend announcement), I’d expect a rate hike in the next quarter.
Energy giant ConocoPhillips (COP) is another name that’s likely to post a dividend hike in the next quarter. The exploration and production firm has paid out a 66-cent dividend for the last six straight quarters -- a 4.89% yield at current price levels. Even though oil prices have pulled back recently, there’s room for COP to raise its cash payout in 2012.
ConocoPhillips has proven reserves of 8.4 billion barrels of oil equivalent, of which just under half is natural gas. That reserve mix is attractive right now, especially as sustained high oil prices in 2012 boost the proportion of revenues that COP is able to bring down to its bottom line, and increase the probability that natgas will catch a bid as a substitute for pricey oil.
Like most peers, the firm’s size is one of its biggest challenges. Its huge scale makes it challenging to find enough attractive projects to fuel growth. Still, as long as oil prices remain in the ballpark of triple-digits, COP will be able to yank consistent cash out of the ground.
COP’s dividend yield sets it at the high end of other E&P firms, positioning that should keep investors interested right now, especially if I’m right about a dividend hike. The spinoff of Phillips 66 (PSX) earlier this year gave COP a much more attractive balance sheet that’s flush with cash. That should help to reduce debt and sustain dividend payouts for the foreseeable future.
I also featured ConocoPhillips in "5 Huge Stocks Breakout Out."
Monsanto (MON) is one of the biggest agrichemical firms in the world, producing a portfolio of genetically modified crop seeds that’s used to increase yields and stave off threats like insects. The firm also produces for the consumer market, selling products like RoundUp herbicide to homeowners looking to reign in their own gardens.
The firm has paid out a 30 cent dividend for the past three quarters, and looks in prime position to hike its payout in the next quarter.
Monsanto’s dominance in the agrichemical business has made the firm its fair share of enemies. Farmer advocacy groups object to Monsanto’s heavy-handed litigation practices (namely for reusing MON’s patent-protected seeds), and health advocacy groups object to genetically modified crops being sold in stores. Still, the benefits of Monsanto’s products are tough for commercial farmers to argue with, so the firm has been able to maintain its foothold without much trouble.
Some strategy missteps have impacted Monsanto’s profitability, however. In 2012, with price cuts in place, expectations tempered, and agricultural commodity prices still looking attractive, Monsanto should be in a good position to earn its characteristically deep margins and generate plenty of cash. The firm has a debt-neutral balance sheet, which should afford plenty of room for dividend rate hikes this year.
Third-quarter earnings on June 27 could be the next announcement for shareholders.
Medical device giant Medtronic (MDT) develops a range of products that includes everything from pacemakers and defibrillators to stents and insulin pumps. Heart products have traditionally contributed around half of MDT’s sales, a solid positioning given the sheer number of people around the world who suffer from heart disease and related ailments.
The firm is focused on treating chronic diseases with its technology, a factor that should help MDT earn bigger revenues per unit sold. At the same time, growth prospects on the horizon largely come from the emerging market world. Even though more than 40% of revenues are earned abroad, a much smaller chunk comes from developing countries. By establishing itself as the go-to medical device firm for a long list of chronic diseases, Medtronic should be able to capture bigger sales as a larger percentage of EM patients get the means to pay for its devices.
Medtronic has been consistent about its 2.6% dividend yield, hiking its payouts like clockwork every year. With the firm’s 24.25-cent dividend payout now paid for four straight quarters, it’s likely that investors will see a bigger dividend payout in the next quarter.
Even though Medtronic is one of the more likely dividend hikers on our list, investors should pay attention to a firm that’s been so consistent in returning value to its owners.
Yum Brands (YUM) is having a solid year in 2012. So far, shares of the fast food firm have rallied close to 10% in spite of the pullback in the broad market. YUM is one stock that’s got emerging markets figured out; the firm was one of the first to enter the Chinese market, the region today making up 42% of Yum Brands’ annual profits.
With more than 38,000 stores worldwide, YUM is actually the largest quick-service restaurant company in existence. The firm’s best-known brands include KFC, Pizza Hut, and Taco Bell in addition to the Little Sheep Hot Pot brand that YUM acquired at the start of 2012 for more diversified exposure to China (the chain also has a handful of stores in the U.S.) The franchise restaurant model is lucrative for owners like Yum Brands because it generates consistent recurring revenues, a core component of any dividend stock.
And because YUM’s U.S. stores are well=established, and its Chinese stores average significantly higher unit sales than most of their fast food peers, the firm is in an excellent position to steadily grow its dividend payout in the next few years. The firm has paid out a 28.5-cent dividend for the last three quarters. I’m anticipating a hike to its 1.8% payout in the next quarter.
To see these dividend plays in action, check out the Potential Blue Chip Dividend Stocks portfolio on Stockpickr.
And if you haven't already done so, join Stockpickr today to create your own dividend portfolio.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.