Income-growth investing is not just about picking rapidly growing companies with high yields. Instead, it's about investing in fundamentally strong companies that have the potential to sustain their dividend payouts while retaining their growth momentum. Fortunately for investors, there are a few publicly listed, robust companies fitting the filter perfectly.
It's hard to miss AT&T (NYSE: T ) when talking about high-yielding, large-cap companies. The telecom behemoth has unfailingly increased its dividend for the last 29 years, with its current yield averaging about 5.2%. And yet, the company doesn't appear to be stressing its financials to sustain its payouts.
Over the last 12 months, AT&T distributed about $9.59 billion in dividends and generated about $12.99 billion in free cash flow, or FCF. This equates to a healthy trailing 12-month dividend-to-FCF ratio of 73.8%, which suggests that there is ample cushioning for further dividend hikes.
AT&T has also ramped up its investments to sustain its growth momentum. Its capital expenditures have risen by about 35% over the last 15 months. This, coupled with its impressive trailing 12-month return-on-investment ratio of 12.8%, suggests that its EPS growth -- averaging 57.5% over the last five years -- will stay at elevated levels in the coming years.
On the operational side, the telecom giant selectively slashed its tariffs to boost its competitiveness earlier this year. Management expects to grow its user base and market share by attracting budget-conscious consumers. AT&T, therefore, appears to have plenty of goodies in store for income-growth investors.
Intersil (NASDAQ: ISIL ) is a high-yielding, rapidly growing company. The circuit manufacturer may not have hiked its dividend payouts over the recent quarters, but it has been rewarding its investors consistently with a $0.48 annual cash dividend for the last four years -- a yield of 3.8%.
It's worth noting that Intersil paid out about $61.9 million in dividends and generated about $88.1 million in free cash over the last 12 months. This equates to a trailing 12-month dividend-to-FCF ratio of 70.2% -- similar to AT&T's. Since its dividends aren't straining its cash flow, Intersil's future payouts face no imminent threat.
The circuit maker has also been growing rapidly. Over the last 12 months, its cash from operations have grown 87.2% while its shares have surged about 70%. More important, the company's gross margins – currently 55.6% – recently improved for the fourth consecutive quarter.
Intersil also recorded about 200 design wins in the tablet and smartphone segment in its recent quarter, which, according to management, should further propel the company's growth in the coming quarters. For an income-growth portfolio, therefore, Intersil is a seemingly good investment option.
Investors looking for modest, but stable returns might want to consider investing in Lexmark (NYSE: LXK ) . The reputed printer manufacturer has been consistently paying out dividends for the last three years. And recently, it hiked its quarterly dividend by 20% -- currently yielding 2.8%.
Over the last 12 months, the printer manufacturer has distributed $74.8 million in dividends and generated $282.6 million in free cash flow. Its low trailing 12-month dividend-to-FCF ratio of 26.4% suggests that Lexmark can not only comfortably sustain its payouts, but also reward its investors with generous dividend hikes.
Regarding growth, Lexmark has ramped up its quarterly capital spending by 11.7% on a year-on-year basis. Its impressive trailing 12-month return-on-investment ratio of 14.5% suggests that these investments will yield handsome rewards over the coming years.
Foolish final thoughts
These three companies have an established foothold in their respective industries. This reduces the volatility and downside fluctuations in their future operating cash flow. Risk-averse income-growth investors should consider holding all three companies to hedge their risks while collecting dividends.
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