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 their dividend payments.
Regions Financial Corporation
Income investors often turn to bank stocks when looking for a steady dividend, but few offer the dividend growth potential of Southeastern regional bank Regions Financial (NYSE:RF).
Like most banks, Regions Financial was walloped during the Great Recession, and in many ways it's taken years for Regions to fully recover. But what's left is a bank that has levers it can pull on both sides of the aisle that could make it a stronger company than it's ever been.
Regions Financial has deployed capital in recent years to purchase mortgage servicing assets, but it could look to gobble up community banks in its core Southeastern U.S. market to improve its presence, or perhaps branch out to adjacent states. Regions has expectations of growing its full-year EPS at a compounded rate of 12% to 15% per year between 2016 and 2018, and M&A would certainly help reach this goal.
At the same time, Regions is looking at ways to make its operations more efficient in order to cut expenses and boost its margins. It's doing this in two distinct ways. First, we're seeing branch consolidations and an expected layoff of about 5% of the company's workforce. Branch consolidation and headcount reduction should allow Regions to eliminate about $300 million in annual expenses, with the company's ultimate goal to shave $400 million off by 2019. The second component is an investment in banking digitization. Enhancing the company's mobile website and rolling out smart ATMs could save the company substantial dollars in the long-run, as well as speak to a younger and underbanked generation of consumers.
Regions Financial is currently paying out a $0.26 dividend annually, good enough for a 1.8% yield. However, with the Federal Reserve in a tightening mode, Regions is liable to see its net interest income increase in the quarters to come. Couple this with Donald Trump's pledge to deregulate the banking industry and we have a scenario where Regions' dividend could double before the end of the decade if the cards fall just right.
TJX Companies Inc.
Another company that should be on the radars of income investors is TJX Companies (NYSE:TJX), the company best known for its TJ Maxx retail stores. The biggest concern at the moment for TJX Companies and its shareholders is the dismal same-store sales results reported by big department stores Macy's and Kohl's this holiday season. Weakened same-store sales could signify that consumers are holstering their spending, which is bad news for the average retailer.
Thankfully, TJX is nowhere near your average retailer.
The company's discounted name brands are among its key selling points. Consumers have a nearly insatiable appetite for brand-name clothing at great prices, and TJX Companies is able to negotiate great deals with its suppliers to draw in repeat customers to TJ Maxx and Marshalls. It's the same strategy that put Target on the map in the 1990s. According to TJX's most recent earnings report, released in November, consolidated same-store sales rose by 5%, with net sales increasing by an even healthier 8% from the prior-year period.
International expansion is another means to TJX's long-term growth. Aside from promoting its TJ Maxx and Marshalls brands in the U.S., the company has been pursuing store openings in Europe and Canada. As of May, the company had a hair over 3,600 stores -- however, management envisions roughly 5,600 stores in the long run. This includes doubling its European and Australian presence, and practically doubling its HomeGoods stores in the United States. Considering the company's strong cash flow, it's not hard to envision its expansion slowing anytime soon.
TJX's $1.04 annual payout (a 1.4% yield) may not be much to look at now, but with the company's full-year EPS expected to explode by nearly 50% between 2016 and 2020 to an estimated $4.80, and the company only now touching the tip of the iceberg with its e-commerce potential, a big hike in the company's dividend may be due.
Applied Materials, Inc.
A final company income seekers would be wise to give a look is Applied Materials (NASDAQ:AMAT). Applied Materials provides manufacturing equipment to semiconductor companies, meaning its business tends to be highly cyclical. If the economy is performing well, Applied Materials is probably excelling. But if semiconductor spending is down, Applied Materials is likely struggling.
With a company like Applied Materials, you learn to take the good times along with the bad. However, as we look ahead a few years, the good appears to be on track to handily outpace the bad. The reason? Look no further than the cloud and the Internet of Things (IoT), both of which are double-digit growth drivers in the technology space. According to BI Intelligence, $6 trillion is expected to be invested in the IoT between 2015 and 2020, with 24 billion connected devices installed by the end of the decade. These devices, and the server demand for data centers and the cloud, are liable to keep foundries exceptionally busy in the years to come, which is good news for Applied Materials.
In September, Applied Materials announced the expectation of 17% compound annual earnings growth over the next three years. In addition to higher wafer fab equipment spending, the company also sees a pathway to 50% sales growth in its display business by 2019. These growth drivers could include the proliferation of smart vehicles, the need for higher performance computing, and of course innovation, which will lead to the development of new, more powerful, memory chips.
Like TJX, Applied Materials' $0.40 annual payout (1.2% yield) isn't a lot to look at for the time being, but with its EPS targeting a midpoint of $2.80 by fiscal 2019, a doubling of its payout could be in the offing.
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. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.