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 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 read on whether or not a company has room to increase its dividend. Payout ratios between 50% and 75% are ideal. Here are three income stocks with payout ratios currently below 50% that could potentially double dividend payments.
We'll begin by looking at a blue-chip biotech stock that was highlighted last year, Amgen (AMGN). Why highlight it again? Because it's just that sound of a dividend stock.
What makes Amgen such an attractive income stock is that it's attacking things from a growth and cost-cutting perspective. Amgen announced in 2014 that it would be laying off about 20% of its workforce, or 4,000 jobs, which was designed to save the company $1.5 billion annually. Admittedly, not all of the savings went directly to Amgen's bottom line. Instead, the savings went to help counteract the higher costs of marketing and launching new drugs. Combined with the new drug growth, which we'll get to in a moment, Amgen is looking to boost its operating margins from 39% in 2013 to between 52% and 54% in the coming years.
Of course, the lifeblood for Amgen isn't its cost-cutting -- it's the company's late-stage pipeline that's kicked out a half-dozen new therapies since December 2014. Chief among those is Amgen's PCSK-9 inhibitor Repatha, which is currently being studied in a long-term cardiovascular trial known as FOURIER. PCSK-9 inhibitors, like Repatha, have generated reduction in LDL-cholesterol (the bad kind) of around 60% in clinical trials. If FOURIER meets its mark and demonstrates superiority over the current standards of care, it'll be hard not to justify Repatha's high price point, and it could very well push Repatha into blockbuster territory.
Amgen currently has a five-year streak of dividend increases that have averaged about 30% annually, meaning its $1 quarterly payout probably has room to grow. With Wall Street anticipating more than $14 in EPS by 2019, Amgen seems like one of the safest bets in healthcare to have its dividend double in time.
Delta Air Lines
An airline? Nope, I'm not kidding. Despite its checkered past, Delta Air Lines (DAL) looks as if it could be a solid income stock for a long time.
Major airlines are among the biggest beneficiaries of lower crude prices. Though jet fuel is almost always the biggest expense for airlines, both big and small, the falling price of jet fuel has been a bigger boon to the major airlines, like Delta, than smaller airlines. The reason is that Delta tends to rely on its sheer size and its customer loyalty to drive growth. Smaller airlines focus on lower ticket prices to lure cost-conscious customers away from the major airlines. With jet fuel prices falling, and looking as if they'll remain low for the foreseeable future, Delta Air Lines has been able to take a more aggressive approach on its ticket pricing, putting pressure on regional and national airlines that are traditionally more price competitive.
Historically low lending rates have also played a role in Delta's recent success. Even if the Federal Reserve hikes rates a few times from where they are now, airlines will still have plentiful access to relatively cheap capital, which is pretty important when making deals to buy new planes. With less than $5 billion in net debt and a 66% debt-to-equity ratio, Delta's balance sheet is as healthy as I've seen it in a long time. The company will have plentiful options moving forward to purchase new planes and reduce its fleet age, or to sign long-term lease agreements to avoid the big upfront expenses associated with new plane orders.
Delta Air Lines is currently paying out $0.81 annually, which works out to a 2.2% dividend yield. Considering that it's on track to generate almost $10 in cash flow per share and just shy of $6 in annual EPS for each of the next two years, its dividend trajectory is likely pointing upward.
Finally, income investors would be wise to give entry level and trade-up homebuilder Pulte Group (PHM), which operates in roughly 50 markets across the United States, a closer look.
Like most homebuilders, the Great Recession put the company on the brink of disaster. However, Pulte has come back stronger than ever, and has new plans to share its wealth with investors.
Fueling the fire has been the Federal Reserve's generally dovish stance on interest rates since late 2008. With the exception of one rate hike in December 2015, the Fed has kept lending rates near historic lows, which has not only allowed homebuilders to gain access to cheap capital, but it's let consumers buy homes at a fantastic long-term rate. Unless lending rates were to shoot considerably higher, homebuilders should continue to reap the rewards of rates that are well below the historic norm.
Moving forward, Pulte is planning to focus on being smarter with its spending, which should help boost its margins in conjunction with the 21% backlog value growth to $3.7 billion it reported in the second quarter. By the end of fiscal year 2017, Pulte plans to reduce its Selling, General, and Administrative expenses from 10% of home-sale revenue in 2016 to 9%, while also slowing its land purchases to fuel its $1.5 billion worth of share repurchases over the next year and a half. The thinking is that if Pulte can devote $1.5 billion to share buybacks, it could probably just as easily lift its dividend payout, which currently stands at $0.36 annually (1.7% yield).
Looking ahead, Pulte is on track to top $2 in full-year EPS by 2017, which should be aided by continued double-digit revenue growth and cost-cutting. Doubling its payout to $0.72 annually, if not higher, seems quite doable over the next 5 to 10 years.