Dividend stocks should always occupy prime real estate in any well-balanced portfolio. And the best income-generating equities to buy are those of companies with growing free cash flows that can fuel regular increases in their payouts. With this in mind, our Fool contributors discuss three stocks that appear to be on the cusp of raising their dividends, perhaps making them great buys right now.
This Big Pharma's cash flows are heating up
George Budwell: Bristol-Myers Squibb (NYSE:BMY) hasn't attracted a lot of attention from dividend investors over the last few years, and for good reason. The drugmaker's 12-month trailing free cash flow of $1.16 billion doesn't exactly inspire confidence, especially when viewed in the context of its lofty payout ratio of 88%.
However, with its top line exploding higher over the last couple of quarters as a result of the strong sales of cancer drug Opdivo and blood thinner Eliquis, this situation appears to be changing for the better. For instance, Bristol reported a monstrous 17% growth in revenue in the second quarter of 2016 to $4.9 billion, compared to Q2 2015. Most important, the drugmaker's top line is forecast to continue to grow by double digits for the remainder of this year, and by high single digits heading into 2017 and beyond.
So, despite immunotherapy star Opdivo's recent clinical setback in the frontline lung cancer setting, Bristol's growth engine is still firing on all cylinders. The net result is that the company's free cash flow should grow substantially in the near term, perhaps leading to an increase in its dividend within the next 12 months or so. Of course, the one caveat entails Bristol's plans on the M&A front. But that shouldn't detract too much from the company's dividend program, as it simply doesn't have the resources to engage in a blockbuster deal at this time.
This dividend looks poised to grow higher
Neha Chamaria: If you're looking for fatter dividend paychecks in the next year and beyond, consider buying 3M (NYSE:MMM). While the conglomerate prioritizes reinvestment of cash into its business for growth, consistently strong cash flow -- thanks largely to a well-diversified portfolio that serves key industries including manufacturing, consumer goods, healthcare, automotive, electronics, oil and gas, and aerospace -- has allowed it enough room to reward shareholders richly. 3M last raised its quarterly dividend in February by a handsome 8%, and also announced a share repurchase program worth $10 billion.
Going by 3M's year-to-date operating performance and guidance, there's every chance of another dividend increase in the coming months. Its projections of 8% to 10% EPS growth in 2016 should translate into strong growth in free cash flow as the company aims to convert 95% to 100% of its net income into FCF this year. As dividends are paid out of FCF, 3M could easily offer investors a bigger chunk of that incremental cash flow while comfortably maintaining its payout ratio of around 50%.
In fact, being able to generate as much in FCF as net income is a terrific sign of a company's financial strength -- something that every dividend investor should note. 2016 also marks the 100th straight year 3M has paid a dividend. Going by the company's rock-solid margins and earnings growth, that dividend streak should only continue.
A dividend that won't crack under pressure
Steve Symington: Considering that Corning (NYSE:GLW) outlined plans last October to deploy over $20 billion in capital through 2019 -- more than $10 billion of which is allocated to be returned to shareholders through share repurchases and dividend increases -- I would be shocked if the specialty glass maker didn't boost its quarterly dividend sometime over the next year.
In fact, when Corning increased its quarterly dividend in February by 12.5%, to $0.135 per share, Chairman and CEO Wendell Weeks promised, "Shareholders can expect to see us increase their dividend payments by at least 10% annually through 2019."
Moreover, Weeks insisted Corning will continue its aggressive share repurchases -- it bought back a whopping $810 million in common shares last quarter alone -- in an effort "to sustain and increase shareholders' value."
Meanwhile, Corning plans to invest the other $10 billion in research and development, engineering, capital spending, and strategic mergers and acquisitions. Last month, we saw some of the fruits of those investments as Corning unveiled Gorilla Glass 5, which survived in lab tests up to 80% of the time when dropped facedown from 1.6 meters onto rough surfaces, and should start appearing as the cover glass of choice on mobile devices from the world's leading OEMs later this year.
Of course, there's much more to Corning than just Gorilla Glass, as the bulk of its business comes from LCD glass sales within its core display technologies segment. But even then, Corning is set to win as it continues to invest in its manufacturing and engineering platforms, and as larger-screen televisions become more prevalent. All things considered, between continuing to invest to maintain its industry leadership and its ambitious capital returns efforts, I think Corning is a great bet for investors who want to count on seeing their dividend checks increase each year.
George Budwell has no position in any stocks mentioned. Neha Chamaria has no position in any stocks mentioned. Steve Symington has no position in any stocks mentioned. The Motley Fool recommends Corning. 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.