Buying dividend stocks that can continue to raise their payouts is a great way to generate sizable returns over long periods of time. As many companies are presently choosing to use their free cash flows to buy back shares instead of increasing payouts, though, solid growth dividend stocks are becoming harder and harder to unearth. With this in mind, our Foolish team of dividend experts offer up three picks below that appear primed for a long run of steady increases to their respective dividend programs. Read on to find out which stocks they recommend to buy in September and why.
A new face on an old name
Tyler Crowe: General Electric (GE -0.35%) doesn't have a great track record of great dividend growth in recent years. The company has only raised its payout once since 2013. There is, however, one big catalyst that General Electric has achieved recently that could lead to a significant increase in the amount of cash going back into shareholders pockets.
Now that General Electric has shed its Systematically Important Financial Institution -- too big to fail -- label by selling off large swaths of its GE Capital arm, it will free up the company to return lots of restricted cash and capital to shareholders. According to management, that involves returning up to $90 billion to shareholders in the form of share repurchases and dividends between 2015 and 2018. We have already seen this starting to take place. After the company sold off its remaining stake in Synchrony Financial and retired shares as part of the deal, it has reduced its overall share count by close to 10% in the past year alone.
When you add another proposed $35 billion in share repurchases, that will lead to a pretty significant drop in overall share count. When that does happen, it means that every dollar spent on dividends goes further for each shareholder. That will help the $35 billion it plans to spend on dividends over that same time frame translate to higher and higher individual dividend payments. General Electric is nowhere close to being the same company it was a few years ago, and that bodes well for future dividend growth.
A well-equipped dividend stock
Tim Green: General Motors (GM 0.70%) trades for just 6 times the low end of its earnings guidance for 2016, a valuation that assumes that earnings are going to decline going forward. With the U.S. automobile market very possibly reaching its peak, investors are no doubt concerned that profitability will take a hit without the benefit of growing demand. For dividend investors, slumping earnings usually means the possibility of a dividend cut. But even if GM's earnings do decline going forward, the dividend has plenty of room to grow.
GM pays investors $0.38 per share each quarter, good for a 4.75% yield. That high yield means that GM doesn't need to grow the dividend all that quickly in order for the stock to be attractive to dividend investors. However, such a small percentage of the company's earnings go toward the dividend that there's the potential for substantial dividend growth over the next few years, especially if GM's earnings hold up better than the market is expecting.
GM expects to produce at least $5.50 in adjusted EPS in 2016, putting the payout ratio at a measly 28%. This low payout ratio means that GM's dividend is safe even under a scenario that sees the company's earnings decline by 50%. Of course, a severe downturn similar to the financial crisis could plunge the company into the red, but short of that, dividend investors don't have much to worry about. And if GM's profits hold up under a flat demand environment, the dividend could be increased substantially in the coming years.
This dividend stock is down for all the wrong reasons
George Budwell: Shares of the generic-drugmaker Teva Pharmaceutical Industries (TEVA -2.29%) took a step backwards last week after two of its patents pertaining to the 40 mg dose of its top-selling multiple sclerosis drug Copaxone were invalidated by the U.S. Patent Trial and Appeal Board. For savvy investors, though, this pullback may represent a great opportunity to pick up shares of a top dividend growth stock on the cheap.
To make a long story short, Teva should have at least one patent covering this novel dosing regimen of Copaxone still in effect, regardless of the outcome of the upcoming trial in the U.S. District Court for the District of Delaware this September. After all, Teva's fifth patent for its novel Copaxone formulation, known as '874, isn't even up for review at the moment. And that's all the company needs to keep generic drug rivals at bay -- that is, unless the generics companies choose to launch at risk for future lawsuits.
Even if Teva is routed in the forthcoming trial, the drugmaker would still be able to tie up would-be generic copycats by appealing this decision, and that process can last for years. In short, this key drug, which makes up around a fifth of Teva's total revenue, shouldn't face generic competition for this particular formulation until at least mid-2018 (and that's presuming Teva loses every single appeal).
So, why is Teva a compelling buy in September? Despite these legal headwinds, the company still offers a decent dividend yield of 2.56%, and its top line is forecast to rise by a healthy 16.8% in 2017, giving it the ammo necessary to up its payout moving forward. And if that wasn't enough, Teva's shares are only trading at a forward P/E ratio of 8.68, making this one of the cheapest dividend-paying drug stocks right now.