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Dividend stocks can be the foundation of a great retirement portfolio. Not only do the payments put money in your pocket, which can help hedge against any dips in the stock market, they're usually a sign of a financially sound company. Dividends also give investors a painless opportunity to reinvest in a stock, thus compounding gains over time.
However, not all income stocks live up to their full potential. Using the payout ratio -- i.e., the percentage of profits a company returns to its shareholders as dividends -- we can get a good bead on whether a company has room to increase its dividend. Ideally, we like to see healthy payout ratios between 50% and 75%. Here are three income stocks with payout ratios currently below 50% that could potentially double their dividends.
Intuit
This week I figured we'd start out in the technology sector and examine a niche software company that I believe could become a dividend gem within the next decade, Intuit (INTU 0.57%).
Intuit's business model essentially boils down to two basic tools: QuickBooks and TurboTax. QuickBooks is Intuit's small business financial management program that helps businesses deal with accounting and payroll, whereas TurboTax is one of the leading names in tax preparation software.
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We don't need to look far to establish that Intuit's niche products are doing well. QuickBooks Online added 140,000 subscribers during the recently reported fiscal third quarter, bringing the total number of paid subscriptions to 1.397 million. Intuit has done particularly well among self-employed business owners, with QuickBooks Self-Employed subscriptions jumping by 50% to 75,000 from last quarter. QuickBooks is a product that benefits from an expanding economy -- and the U.S. economy spends far more time expanding than contracting.
Intuit is also taking advantage of the demise of brick-and-mortar tax preparation services. With tax preparation software becoming easier to use and the cost advantage of tax software sticking out like a sore thumb compared to that of professional tax advisors, it's probable that TurboTax and its peers will continue to siphon market share from brick-and-mortar locations.
Following a third quarter report that saw sales rise 8% and adjusted EPS pop 20%, it's also clear that Intuit has made smart moves to improve its margins. Currently paying out $1.20 annually (1.1% dividend yield), but capable of producing more than $5 in EPS by the end of the decade based on its fairly predictable mid-to-high single-digit EPS growth rate, Intuit's dividend might reasonably double within the next five-to-10 years.
Opus Bank
Next, we'll take a look at a sector known for producing income giants -- financials -- and take a brief dive into why Opus Bank (OPB +0.00%) could greatly increase its dividend in the coming years.
Opus Bank is a regional bank located on the West Coast that's geared toward providing financial services to small and mid-sized businesses. Opus is primarily focused on growing its commercial loan portfolio, but it does provide basic financial services, such as deposits, CDs, checking accounts, and financial advisory services.
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Much like Intuit relies on economic growth to drive small and medium-sized business demand, Opus Bank is counting on long-term growth in the U.S. economy to drive entrepreneurs and smaller businesses to take out loans. Because Opus deals with smaller and sometime less proven businesses, it's also able to garner a slightly more advantageous interest rate on its loans. This has been key for Opus, which cleared 3.84% in net interest margin during the first quarter, while most money center banks delivered net interest margin of around 3%. While the Federal Reserve's boosting lending rates would be immediately beneficial to the banking sector, Opus' focus on the little guy is paying big enough dividends that even if the Fed continues to walk on eggshells, it should do just fine.
Digging a bit deeper, we also see that the bread-and-butter metrics for Opus are headed in the right direction. New loan funding grew 32% on a year-over-year basis (5% on a linked-quarter basis), and average deposits increased by $131.1 million to $5.3 billion. More importantly, its efficiency ratio (a banking measure of margin) fell to 47.9%. Here, a lower number is better since it demonstrates that Opus is keeping its expenses under control.
Opus is currently paying out $0.72 annually but is on track for $3.55 in full-year EPS in fiscal 2017 according to Wall Street's estimates. With a real shot at a double-digit percentage annual growth rate through 2020, I'd like to believe a dividend double is quite possible.
Cardinal Health
Dividend investors would also be wise to pay attention to Cardinal Health (CAH +0.35%), which is already showing some flair as an income gem in the healthcare sector.
Cardinal Health's primary focus is on improving and optimizing the pharmaceutical and medical device supply chain between drug and device manufacturers/producers, and pharmacies, hospitals, and healthcare providers.
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You can probably already surmise why I view Cardinal Health as such an intriguing long-term opportunity. At the moment we're witnessing more than 10,000 baby boomers retiring each day. Not only are these boomers retiring, but they're living longer than ever, meaning there's a long-tail opportunity for all facets of the healthcare industry to provide care to our nation's growing elderly population. The U.S. Census Bureau anticipates that the elderly population will nearly double between 2012 and 2050, and the number of people aged 85 and up will more than triple. That's a big opportunity for a supply chain company like Cardinal Health, which is supplying branded and generic drugs to hospitals and providers.
Cardinal Health has also been able to ignite growth via acquisitions. In October it completed the $1.94 billion purchase of Cordis, a cardiology and endovascular products producer from Johnson & Johnson (JNJ +0.55%) that's expected to add $0.20 in adjusted EPS as soon as 2017, with cost synergies totaling more than $100 million by 2018. With Johnson & Johnson focused on a faster-growing pharmaceutical segment, Cordis became expendable – and it found a perfect home with Cardinal Health. Look for Cardinal to regularly boost its top- and bottom line with inorganic growth.
Cardinal Health's annual payout of $1.80 is good enough for a respectable 2.3% yield. Yet, with $7 in full-year EPS forecast by fiscal 2019, a dividend increase seems likely.
