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5 Dividend Stocks Ready to Pay You More Cash - views
WINDERMERE, Fla. (Stockpickr) -- Ben Bernanke did a lot of winking and elbow nudging last Friday, not-so-subtly tipping investors to the possibility that QE3 may be on the way. At some point. Eventually.
Investors have been voracious about QE3 for the past several months, working themselves into a tizzy over the possibility that the Fed would start dumping more cash into the market. I’m not so sure that Bernanke’s speech in Jackson Hole wasn’t just lip service. But for dividend investors, the implications of another round of easing are big.
Already, treasury rates are near zero at the same time that inflation is getting pegged above 2.2%. If retail investors’ QE3 dreams come true, it’ll mean that inflation creeps higher while interest rates remain near all-time lows.
So what’s a tired income investor to do? Why, just step in front of another round of dividend hikes, of course.
Today, we’re scouring the stock market for a new group of big-name stocks that look ready to hike their dividend payouts in the coming quarter. In other words, these five firms are getting ready to boost dividends; they just don't know it yet.
In the past few months we’ve had some stellar success in finding future dividend hikes 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 this mid-2012 rally.
Without further ado, here’s a look at five stocks that could be about to increase their dividend payments in the next quarter.
First up is $22 billion supplemental health insurer Aflac (AFL). Aflac is one of the biggest supplemental coverage firms in the world, with operations in the U.S. and Japanese markets.
Right now, it pays out a 33-cent dividend to shareholders each quarter, a payout that works out to a 2.87% yield. But I think there’s room for Aflac’s payout to grow in 2012.
Aflac is probably best known here at home for its popular ads that feature an unlucky cartoon duck. But AFL’s customer risks look a whole lot better than their mascot would imply. The firm’s policies pay out predetermined cash benefits if customers meet a predetermined condition -- normally contracting a disease or being involved in an accident. These sorts of loss-of-income policies are proving popular in the wake of the Great Recession as consumers look for way to protect income. And since they’re deducted directly from paychecks in many cases, there’s no sticker shock effect from seeing money go out each month.
The vast majority (around three-fourths) of Aflac’s business is Japan. The company’s Japanese customers are historically stickier than U.S. consumers, and high demand for supplemental insurance products has helped create substantial growth -- and impressive cash generation.
Low debt and ample balance sheet liquidity should make Aflac a prime candidate for a dividend hike in 2012.
Starwood Hotels & Resorts
Upscale hotelier Starwood Hotels & Resorts (HOT) is the firm behind brands like Sheraton, St. Regis, Aloft and Westin. The firm is also another prime candidate for a dividend hike -- Starwood currently pays out an annual dividend of 50-cents, a payout that the firm has managed to increase every year since its inception.
With the firm’s financials finally starting to catch up with investors’ hopes, HOT should be good for an even bigger bump this year.
Starwood doesn’t own all of its hotels. Instead, only around 5% of properties show up on HOT’s balance sheet. The rest are merely managed by the firm on behalf of owners, a setup that takes the most substantial risks (like maintenance and real estate values) off of HOT’s balance sheet. That service-driven (rather than capital-driven) strategy means that the firm earns consistent and recurring revenues with extremely high switching costs. After all, a St. Regis can’t easily or cheaply switch brands if its owners have a dispute with Starwood. That’s a good mark for an aspiring dividend stock.
While Starwood’s yield is relatively small at just under 1%, the firm has also been working hard to make its service revenues more material. Currently the firm’s owned properties make up most of its operating income. Wherever their source, earnings are currently more than strong enough to support a bigger dividend payout next year.
Brown & Brown
Insurance broker Brown & Brown (BRO) may get lumped with the rest of the insurance industry, but the firm couldn’t be more different. At its core, Brown is a sales business, focused on selling insurance policies that are underwritten by other firms that take the balance sheet risks.
While this business generates less income than a traditional insurance model, investors shouldn’t eschew BRO or its 8.5-cent quarterly dividend payout. With strong growth this year, the firm looks like a prime candidate for a hike to its 1.3% yield.
Brown & Brown is an insurance agency that focuses on small and middle-market customers, groups that most appreciate BRO’s service-oriented approach to insurance. While larger client firms with more external expertise may be willing to take a more hands-off (and cheaper) brokerage alternative, small and medium sized clients want more guidance. That leads to sticky customer relationships for Brown, and it’s helped to make the firm one of the most profitable insurance brokers in the country.
Brown has been a big proponent of a growth-by-acquisition strategy. While that strategy failed to boost the firm’s top line in the last few years, numbers are increasing again this year. That should help to calm any investors who were worried about the trajectory of Brown & Brown’s income statement.
With a healthy balance sheet in tow, BRO is positioned to pass a bigger chunk of cash onto investors in the form of dividends.
Middle-tier waste management firm Waste Connections (WCN) may not have the same scale and notoriety as its larger publicly-traded peers, but there’s no doubt that this is a garbage stock -- and I mean that in the best way possible. Waste companies are a friend to dividend investors: They’re typically not terribly capital intense and they generate sticky recession resistant revenues.
Now WCN looks ready to hike its dividend in 2012.
Even though WCN competes directly with the big names in garbage disposal, it makes a conscious effort to avoid their geographic footprints. Rather than the lucrative urban areas that bigger rivals focus on, WCN has its operations in smaller markets that provide less competition. And that’s worked like a dream…
Not only does WCN have deeper net margins than its larger peers, but it’s also managed to churn out significant growth through and after the recession when rivals faltered. One side effect of that growth is a lower dividend payout, but it makes much more sense for WCN to be financing its growth internally right now instead of paying shareholders cash and limiting returns.
Strong free cash generation should help spur an increase to the firm’s quarterly dividend of 9 cents, a 1.25% yield at current prices.
C.H. Robinson Worldwide
Likewise, business is booming for C.H. Robinson Worldwide (CHRW). The firm is a $9 billion third-party logistics provider, offering firms truck brokerage, air and ocean freight forwarding, and a number of supporting services. With the rising price of crude oil pushing transportation costs ever higher, CHRW’s services are in-demand right now, and they should continue to be popular as the complexities of shipping increase.
At its simplest, C.H. Robinson is in the business of pairing off shippers with carriers as efficiently as possible. Because CHRW has the scale to handle the needs of both parties quickly and cheaply, it’s one of those services that both parties are willing to support. The danger with that middle-man position, of course, is that if it becomes too profitable, one of the sides is likely to step in and take the profits for themselves.
But in CHRW’s case, scale has big advantages, namely buying power that carriers and shippers don’t have without exposing themselves to massive risks. That factor should keep the firm’s business protected from rivals.
With an asset-light business model, most of CHRW’s costs go into commission compensation for its sales team. That’s a good thing because it means that those expenses tend to ebb and flow with sales volumes and keep margins relatively flat. And predictable margins are a must-have for dividend investors.
Right now, CHRW pays out a 33-cent quarterly dividend, a 2.33% yield at current price levels. With plenty of cash getting thrown off from operations right now, I’d expect to see a dividend hike in the next quarter.
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, 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.