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5 Dividend Stocks Ready to Give You a Raise - views
BALTIMORE (Stockpickr) -- You may have heard it before: Quality is leading in this market.
What it means is that big, blue-chip dividend payers are outperforming other stocks in this environment. In a sense, that's providing a performance double whammy for investors with exposure to quality stocks in their portfolios: They're collecting (relatively) hefty dividend yields, and they're laying claim to outsized capital gains as well. That's not hugely surprising, of course.
With interest rates scraping historic lows, the yields being paid out by dividend stocks in this environment provide a major incentive to pile into income stocks. Couple that with a rally in 2013 that most investors still haven't bought into, and the result is an emphasis on quality in the middle of the second quarter. Utilities, consumer staples and telecoms are among the hottest performers on a relative strength basis as I write.
Looking back historically, that relationship of dividends and total returns ring pretty true.
According to research from Wharton Professor Jeremy Siegel, reinvested dividends account for as much as 97% of total market performance. Better yet, dividends even impact how big your capital gains are. Over the last 36 years, dividend stocks have outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, all while paying out cash to their shareholders, based on data compiled by Ned Davis Research.
With companies sitting on record corporate cash and profits, it's going to be crucial to keep looking ahead for the companies most likely to dish out dividend hikes. In the past few months we've had some stellar success in finding future dividend increases just by zeroing in on a few key factors. Now we'll look at our crystal ball and try to do it again.
For our purposes, that "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 three, they do dramatically increase the odds that management will hike their cash payouts, especially as investors start to get antsy about whether or not 2013's rally will be able to hang on.
Without further ado, here's a look at five stocks that could be about to increase their dividend payments in the next quarter.
Most investors probably would think of Intel (INTC) as a big dividend stock. A big stock, sure, but a core holding for income investors? In fact, Intel's yield weighs in at 3.75%. I've written about Intel's wherewithal to hike its dividend payouts in the past and the chances of a hike are heating up this quarter.
Intel tips the scales as the world's largest chipmaker. The firm's 80% share of the microprocessor market is absolutely massive -- and it throws off mountains of cash. That hasn't spared the firm from the semiconductor industry's selloff, however. The industry as a whole has faced pressure in the last few years as investors got antsy about a capital-intense business with too much supply in a soft economy, but Intel doesn't really fit that industry mold. The firm's margins are in the deep double digits, and its cash generation funds a dividend payout that's huge for the tech sector. Right now, Intel has the wherewithal to hike that payout even more.
Financially, Intel is in great shape. While semiconductor firms have a reputation for being leveraged (making chips is capital-intense), Intel's balance sheet is almost debt-neutral. With its standard-bearer share of the market for computer chips and material growth opportunities ahead of it in the mobile chip market, income investors could do worse than Intel.
Look out for a dividend hike in the next quarter.
2013 has been a mixed year for Lowes (LOW). While the nearly 8% year-to-date gain in the stock is substantial, it's short of the broad market's impressive run higher this year. And it's even further from the huge rally that real estate and housing-related firms have enjoyed over the same period. But Lowe's positioning in a hot market should be reflected in its first-quarter numbers at the end of the month -- and that could come with a dividend boost.
Lowe's is the second-biggest home improvement retailer in the world; the firm operates around 1,750 stores spread throughout the U.S., Canada and Mexico. That positioning proved to be stellar during the Great Recession. While home prices languished, homeowners spent cash on improvements, boosting sales for Lowe's and its rivals. During the recession, the firm invested in better merchandising and increasing the presence of its store brands, two factors that have helped the company hang onto strong margins for the retail industry.
While Home Depot (HD) closed that gap through a restructuring, Lowe's still enjoys strong positioning in the home improvement duopoly. The firm avoided egg on its face by skipping the challenges HD faced in China, and a strong private-label tool brand rounds out the picture at LOW.
Historically, Lowe's has been another name that hasn't gone more than a few quarters without pulling its payouts in line with its earnings. Keep an eye out for a potential hike to the firm's 6.25-cent quarterly dividend at the end of this month.
Kellogg (K) has managed to fare better this year. The $23 billion cereal maker has seen its share price run 13.5% higher in 2013, buoyed by strength in the consumer staples sector. Kellogg owns some of the most attractive names in the convenience food segment cereal favorites like Special K, Frosted Flakes, and Rice Krispies round out a food portfolio that includes Keebler, Pringles, and Morningstar Farms. As long as Kellogg keeps innovating with new product offerings, it should be able to keep pushing its revenue numbers higher.
It sounds crazy, but the cereal business is cutthroat. Because Kellogg, General Mills (GIS) and store brands have few competitive advantages among them, the brand-name cereal makers have to market harder than most. Kellogg's track record of pumping a huge chunk of sales back into advertising budgets is promising for that reason.
Kellogg does have an advantage in the unique products it innovates -- and through its product diversification. That diversification is especially valuable for a firm such as Kellogg; because the company already has the distribution network and merchandising know-how from its cereal business, adding other foods to its business doesn't stretch the bounds of the firm's core business at all.
Kellogg has a very good track record of returning value to shareholders. It has only skipped a dividend hike in four of the last 50 years, and its current 44-cent quarterly dividend works out to a 2.8% yield. The firm's payout ratio still leaves it with room for a dividend hike in the next quarter.
Coach (COH), on the other hand, is far from a consumer staple. The handbag maker is about as discretionary as spending can get, but it's managed to thrive in good times and bad ones alike.
During the Great Recession, management struck a beautiful balance between luxury and price, taking the risk that they wouldn't dilute their brand by lowering prices to court a consumer with less spending money. It worked. And while investors shouldn't make the mistake of thinking that specific trick can work again, it should be a big indicator of Coach's willingness to break from the conventional model to find growth. The firm's network of company-owned stores gives it an attractive footprint, especially in markets like China where Coach is picking up nouveau-middle class spending at a breakneck pace.
Coach is starting to look cheap again. The firm's earnings multiple is back down from the ridiculous valuations shares saw a year or two ago, and at current prices, COH's 30-cent dividend works out to a respectable 2% yield. With ample cash and almost no debt on its balance sheet, investors should look out for a raise in 2013.
While the name is the same, J.M. Smucker (SJM) is a very different company than it was just a few years ago. That's because the peanut butter and jelly giant acquired Folgers in late 2008 for $3.7 billion, doubling its scale during a time when equities were trading at a discount. In the years since, Smucker has grown significantly, proving to investors that just because jams aren't exciting doesn't mean the company's performance isn't.
Smucker's collection of valuable brands also includes names such as Jif, Crisco and Pillsbury (as a licensee). By owning some of the most well-loved brand names on grocer's shelves, SJM's categories are among the last to suffer from consumers' trading down -- and one of the first to recapture that spending on an economic upswing. And because Smucker owns such a dominant group of products, it's able to command the best positioning in its categories on grocery shelves, as well as favorable terms when it works out pricing with those grocers. The result is net margins that typically ring in just shy of double-digits and plenty of cash generation.
SJM has a strong balance sheet, with enough dry powder to handle any medium-term hiccups. The firm's current 52-cent dividend payout works out to a 2% yield -- but I think it's likely to get ratcheted higher either this quarter or the next.
To see these dividend plays in action, check out the at Dividend Stocks for the Week 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, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji