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3 Candidates for the Next Great Dividend Stock

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Last week, a reader left a comment on my article "5 Dividend Stocks for the Lazy Investor" asking why people keep writing articles about the same handful of stocks that generated huge returns during the last 30 years, and wouldn't our time be better spent seeking out the great stocks for the next generation? The comment raises a good point. Although many of the members of the original S&P 500's top performers are still great investments, it would be very foolish to ignore tomorrow's potential dividend champs. With that in mind, I've searched around Fooldom and dug up three potential candidates for the next great dividend stock.

A word on yields
Let me just say now that dedicated income investors probably won't be too impressed with the yields I've collected here. Normally, I look for yields above or at least approaching 3%. For the purposes of this exercise, I've put a greater emphasis on growth, so I'm willing to settle for a smaller dividend. In theory, as the company grows, so should the dividend yield.

Now, let's move on to the dividends.

The elite gamer
First up is the video game publisher Activision Blizzard (Nasdaq: ATVI  ) , which pays a dividend of 1.4%. Unless they were panicking over World of Warcraft's declining subscription numbers, investors have largely ignored the stock for the past two years. I think this is a mistake. Although WoW may have peaked, the Call of Duty franchise is still breaking records with every release. The millions of copies of COD: Modern Warfare 3 already sold will continue to provide revenue through the sale of downloadable content and subscriptions to the Call of Duty: Elite service.

The company has also been busy looking for new revenue streams. It plans to create a real-money auction house for Diablo III to allow players to profit from selling the booty they pick up in-game in exchange for a small listing fee. The company has also revealed that it's begun working on a second massively multiplayer online game codenamed Titan. Even if WoW continues to lose subscribers, I'd be willing to bet that these new revenue streams will pick up the slack, ensuring that the company will remain a cash-making machine.

A stock for Tim "the Tool Man" Taylor
When looking for solid dividend players, I really like to see a business model based on consumable products, which is exactly what funds Kennametal's (NYSE: KMT  ) 1.5% dividend. The company is a leading maker of high-end drill bits, saw blades, and crushing bits used for construction, mining, and transportation customers. These parts wear out regularly and have to be replaced, thus ensuring repeat purchases.

I also like the fact that Kennametal employs a team of more than 700 scientists and engineers all thinking up new methods of slicing and dicing things. Thanks to the team's work, the company earns an average of 30 U.S. patents a year. Moreover, 40% of Kennametal's sales come from products designed in the last five years. This drive for innovation suggests that the company will likely remain a market leader for the foreseeable future.

The old-fashioned
All right, I'll admit I'm cheating a little with this last pick. Beam (NYSE: BEAM  ) was formerly the alcoholic beverages segment of original S&P 500 member Fortune Brands. Last year, Fortune Brands split into two companies -- the second is Fortune Brands Home & Security -- when it finally realized that spirits have almost nothing to do with home and security products.

As a stand-alone company, I think Beam holds more value for investors than it did as a part of Fortune Brands. Thanks to Beam's strong brand portfolio -- which includes premium brands like Jim Beam, Maker's Mark, and Courvoisier -- it's now the fourth-largest global spirits company. As it happens, the booze-making industry is ideal for dividends. It stands up well to tough economic times and exhibits strong brand loyalty. In the absence of the more economically sensitive home and security business, Beam should have little trouble generating the cash flows necessary to maintain -- and hopefully increase -- its current 1.5% yield.

Foolish takeaway
I think I've found three potential candidates for the next great dividend stock. To keep track of their performance, I am initiating outperform CAPScalls on all three. You can follow their progress here. I've also found one more company that I think could achieve dividend greatness. To find out what it is, check out this special report: "The Motley Fool's Top Stock for 2012." The report is free, so click here to download it today.

The Motley Fool owns shares of Activision Blizzard. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard, Beam, and Kennametal, as well as creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Fool contributor Patrick Martin owns shares of Activision Blizzard. You can follow him on twitter @TMFpcmart03. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 13, 2012, at 9:22 PM, InvestWhatWorks wrote:

    I own shares of Beam and anticipate holding my shares and reinvesting the dividend for the long term (assuming Beam isn't acquired by Diageo or another large liquor company in the short term).

    I would like the dividend to be larger, but I see good potential to grow that dividend in the future.

  • Report this Comment On January 16, 2012, at 6:43 PM, jssiegel wrote:

    Sometimes the bulls win.

    Sometimes the bears win.

    Pigs eventually get slaughtered.

    Chickens get chicken feed.

    Even with MM accounts at 1%, these stocks are the latter.

  • Report this Comment On January 27, 2012, at 9:04 AM, InvestWhatWorks wrote:

    Beam just increased their dividend today.

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