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, but they're also 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.
Just as we did last week, we'll kick this week off by looking at a sector well-known for solid dividends, financials, and examine why money center giant JPMorgan Chase (NYSE:JPM) should be on income investors' radars.
Like most banks, JPMorgan's biggest challenge is overcoming low yields in the U.S. and around the world. While low interest rates are great for the consumer, they're terrible for banks that rely on interest-based income. Between the uncertainty surrounding Brexit and the fluctuations we've witnessed in U.S. GDP and jobs growth, it could be a while before the Federal Reserve has a genuine opportunity to tighten monetary policy. But a low-yield environment is no reason to consider avoiding a strong bank like JPMorgan Chase.
For instance, JPMorgan Chase has a number of levers it can pull to cut its expenses. In February 2015, it announced the upcoming closure of 300 of its branches, which amounted to more than 5% of its 5,602 branches at the time. Consumers are flocking to the convenience of mobile apps, which is just fine by JPMorgan Chase since mobile app transactions cost just a fraction of what teller-based interactions do. JPMorgan Chase has even been cutting back on the number of ATMs in service, once again as a response to mobile payment use increasing. All told, the company's consumer business is looking to save more than $5 billion by 2017 from its 2012 expenses.
Secondly, I believe investors can get behind the idea of "when," not "if," interest rates are going to rise. It's not worth trying to play the guessing game on what the Federal Reserve will do every few months. Instead, it's reasonable to assume that at some point in the intermediate future interest rates will begin to normalize to their historic averages, and banks will see their net interest margins expand. There's far more upside to margins for banks than downside at the moment.
Lastly, JPMorgan Chase sailed past the latest Comprehensive Capital Analysis and Review from the Fed, along with more than two dozen of its peers. After passing the stress test, JPMorgan received regulatory approval to repurchase up to $10.6 billion worth of its common stock between July 1, 2016 and June 30, 2017. In other words, this is a healthy bank.
Currently paying out $1.92 annually, JPMorgan Chase is yielding 3.2%. But with full-year EPS potentially climbing over $7 by as soon as 2018, a dividend double could be in the cards within the next decade or less.
Next, I'd suggest turning your attention to the healthcare sector, where Quest Diagnostics (NYSE:DGX) could prove to be a dividend darling in the making.
The biggest concern for Quest Diagnostics' shareholders is simply competition. There are a growing number of diagnostic companies entering the space, which could put downward pressure on Quest's margins. Also, to some extent, Quest finds itself at the mercy of reimbursements. If for some reason the federal government were looking to tighten spending on Medicare or Medicaid, Quest could feel the pinch.
Now that you have a better idea of what the risks are, let's take a look at the rewards. First, we have a definitive push toward personalized medicine in oncology and beyond. Rather than treating all patients similarly, diagnostic companies like Quest are allowing physicians to identify biomarkers and characteristics that are unique to patients, which can aid in the treatment process. Don't get me wrong, Quest runs a host of routine blood tests, too. But it's the company's work in personalized medicine that could really drive near-term growth.
Over the longer-term, Quest Diagnostics appears to be poised to benefit from a growing population of elderly Americans. The U.S. Census Bureau expects the elderly population to grow by more than 40 million between 2012 and 2050, which should keep Quest quite busy. The elderly are typically responsible for the lion's share of health expenditures in this country, so a steep rise in the elderly population should translate into a doubling in business demand for Quest because of medicine personalization.
Quest's management team is also keenly focused on improving its operations. The company implemented a five-point strategy in 2012 that saw it divest six business components for more than $1 billion. Some of the capital generated from these sales was used to repurchase Quest's common stock. Other components of Quest's plan include simplifying its business model and being disciplined with capital deployment. In short, Quest is being smart about its margins.
Quest is currently handing out $1.60 annually, which is good enough for a 2% yield. But steady EPS growth in the mid-single-digits could very well help push this payout to $3.20 annually over the next decade.
Lastly, income investors would be wise to take a look at recreational vehicle (RV) behemoth Thor Industries (NYSE:THO), which has delivered record sales and earnings results over the past nine months.
As with all companies, Thor Industries has risks that investors should be aware of. The biggest risk here is the company's cyclical nature. RVs, whether they're motorized or towable, tend to be hefty investments, meaning the U.S. economy usually has to be growing for consumers to take the plunge. Additionally, investors should also understand that a company like Thor has capacity constraints in terms of what it can produce. Thor occasionally has to boost its expenditures in order to boost its production capacity, which can be a short-term drag on profits.
But there's a lot to like if you're looking for a company that could deliver fairly steady long-term growth and income. To begin with, how about the benefits Thor Industries will experience from prolonged low interest rates? As we noted earlier, banks aren't enjoying near-record low lending rates, but it's great for the consumer looking to make an expensive purchase with the lowest possible financing costs. As long as lending rates remain low, Thor's results could march higher.
Thor is also benefiting from a substantial reduction in fuel prices at the pump. Crude prices are unlikely to rebound overnight with both a glut of oil in global terminals and Saudi Arabia standing pretty firm against cutting global output to boost crude prices. Fuel can be a big cost of ownership for a motorized RV, so to see sales of motorized RVs jumping 21% in the third quarter is impressive.
Acquisitions could also be a catalyst for Thor. Less than two weeks ago, Thor Industries announced the $576 million purchase of Jayco, a smaller recreational vehicle peer known best for its travel and camping trailers. The purchase of Jayco expands Thor's product portfolio, as well as giving the company access to base of more than 850 dealers throughout North America with only modest overlap with Thor's existing dealers. The transaction is expected to add to sales and profits immediately.
Thor's current payout of $1.20 annually (1.7% yield) may not knock your socks off, but with $6 in full-year EPS a genuine possibility by 2018, a series of dividend increases leading to a double from its current level could be in the cards in the coming years.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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