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3 Dividend Hikes to Look Foward to in October

By Jeremy Bowman – Sep 28, 2016 at 8:47AM

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These stocks could see substantial dividend increases next month, which makes it an excellent time to buy.

Dividend investors tend to focus on yield, but a lot of the best-known income stocks have been growing their dividends by just 1% or 2% in recent years. 

This is often a problem for dividend aristocrats, stocks that have increased their dividends for 25 years straight, a status they're loathe to give up. Wal-Mart, for example, has raised its dividend by just 2% in each of the last three years, while AT&T has hiked its dividend by just a penny each year since 2008, or between 2% and 2.5%, and Procter & Gamble raised its dividend just 1% this year. For investors looking for more growth, here are three dividend hikes to consider coming in October.

Image source: Motley Fool. 

1. Starbucks

Since it first started paying a dividend in 2010, Starbucks (SBUX 0.76%) has been a model of dividend growth. Each year, it's raised its quarterly payout by 23% or more, and now it offers a 1.5% yield. In the company's fourth-quarter report last October, it increased its dividend 25% from $0.16 a share to $0.20. That growth was fueled by a 19% jump in adjusted earnings per share. 

Starbucks' rapid growth has slowed slightly this year, as comparable sales were up 4% in its most recent quarter, the first time in five years that figure has been under 5%. However, analysts expect a similar increase in the bottom line, with a 19.6% increase in EPS to $1.89.

I'd expect a dividend increase from Starbucks in line with its history, raising it at least 20% to $0.24 a quarter. The coffee company continues to grow at a fast pace, with plans to add 500 stores a year in China for the next five years, and it has ample room to raise its dividend, even without strong profit growth since its payout ratio, or the percentage of profits it spends on dividends, is just 41%. With a solid balance sheet, the company should have no problem increasing that ratio if it needs to.

Image source: McDonald's.

2. McDonald's 

Unlike Starbucks, McDonald's (MCD -0.89%) dividend increases have been less than stellar in recent years as the last three have been between 4% and 5%. The fast-food giant was going through some tough times, seeing same-store sales lag in the U.S. thanks to an onslaught of fast-casual competition and sales in Asia plummeting on several food safety crises.

However, things are looking better under the leadership of CEO Steve Easterbrook, who took the helm last March. Easterbrook introduced all-day breakfast in the U.S. to rave reviews, promised to refranchise thousands of stores freeing capital to return to shareholders, and has moved away from industrial food processing by committing to using antibiotic-free chicken and cage-free eggs.

As a result, McDonald's stock and its profits have surged over the past year. Analysts are expecting EPS growth of better than 11% this year, following declining EPS through much of 2014 and 2015. I'd expect shareholders to be rewarded as a result.

Historically, McDonald's has raised its dividend in September. Last year, the announcement came in November, alongside its turnaround plan. There's a good chance it could come this year with the third-quarter earnings report, which is due out October 22. If management raises it in step with profits, investors could see the dividend jump from $0.89 all the way to $1. With a current payout ratio of 66% and capital being freed up by refranchising, I'd expect the company to be more aggressive with dividend hikes than it has been in the last few years.

3. Churchill Downs

The racetrack and casino operator best known as the owner of the home of the Kentucky Derby has put up steady growth in recent years. Churchill Downs' (CHDN -1.02%) stock has more than tripled in the last five years, and it jumped in August on another strong earnings report.

The trend pushed by millennials of spending on experiences, rather than things, should help drive long-term growth for the entertainment company, especially with its unique set of assets.

Churchill Downs isn't a big divided payer, with a yield of just 0.8%, but the company pays out that dividend just once a year, so the distribution date is worth paying attention to. For the past three years, the company has raised its dividend and declared it at the end of October when it reports third-quarter earnings. Its last five hikes have been for 15% or more, and another 15% increase would bump the payoff to at least $1.32.

With EPS expected to grow nearly 50% this year, we could see a more aggressive increase since the company has plenty of room to grow its dividend with a payout ratio near 25%. With more acquisitions likely, and favorable operating leverage, I'd expect a strong dividend growth path ahead for Churchill Downs.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. 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.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
$243.76 (-0.89%) $-2.19
Starbucks Corporation Stock Quote
Starbucks Corporation
$84.81 (0.76%) $0.64
Churchill Downs Incorporated Stock Quote
Churchill Downs Incorporated
$180.74 (-1.02%) $-1.87

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