High-dividend yields may be tempting in today's interest-rate environment, but investing in dividend growth stocks is an even better way to boost your income and build your wealth in the long run. As companies usually increase their dividends when they're confident about their growth prospects, investing in such stocks also offers strong capital appreciation potential aside from greater dividend income. With that in mind, check out why our contributors believe Enbridge Inc. (ENB 1.71%), Illinois Tool Works (ITW -0.28%), and Delta Air Lines (DAL -0.06%) could boost their dividends in 2017.
Sending synergy savings to shareholders
Chuck Saletta (Enbridge): Canadian energy pipeline giant Enbridge is in the process of buying its U.S.-based counterpart, Spectra Energy (SE). As part of communicating the deal, Enbridge indicated that it would likely be able to deliver 10% to 12% annual dividend increases through 2024. It's rare for a company to be able to project that far out in the future, but given both the tollbooth nature of many pipeline businesses and the synergy in savings from the deal, it just might come to pass for Enbridge.
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Enbridge has already increased its dividend by 10% for 2017, but with expected dividend increases through 2024, it looks as if there's clearly more room for a rising dividend. U.S.-based investors should note that as a Canadian company, Enbridge's dividend is paid in Canadian dollars, so the payment will vary each quarter based on currency fluctuations. U.S. investors also face a withholding tax on dividend payments on Canadian companies, unless you own your shares in a qualified retirement account.
This industrials dividend is growing fast
Neha Chamaria (Illinois Tool Works): If you're looking for higher dividends in the industrials sector this year, consider Illinois Tool Works. Going by the conglomerate's dividend track record and growth projections, I expect a solid dividend increase coming your way in 2017.
While Illinois Tool Works has increased its dividends for more than 50 years now, it is only in recent years that its dividends have become bigger and better.
ITW Dividend data by YCharts0
Illinois Tool Works bumped up its dividend by a hefty 18% last year, taking its compounded dividend growth rate since 2012 to 14%. Going by the company's projections, I expect another big raise coming in near months: Illinois Tool Works expects to expand its operating margin by at least a percentage point to 23.5%, grow its earnings per share by 7% at the midpoint, and convert all of its net income into free cash flows this year.
As Illinois Tool Works entered 2017 with FCF exceeding $2 billion and a dividend payout ratio of only about 40%, it could easily offer a dividend raise above its projected EPS growth of 7% this year. Given its solid mix of cyclical and defensive businesses, it's unlikely the company will fall behind its EPS target for the year. In short, I'm not only confident that Illinois Tool Works will boost its dividend this year, but I also expect it to be a big one.
This airline's dividend could soar this year
Keith Noonan (Delta Air Lines): Compared with stocks that are more commonly renowned for their dividend components, Delta Airlines doesn't yet offer a chunky yield or a dependable track record of payout increases, but the company has been aggressive in boosting its payout since first offering a dividend in 2013 and deserves the attention of income-focused investors. Delta has delivered 237.5% payout growth since its first distribution, and with a payout ratio of just 15.9%, the airline has plenty of room to continue payout increases.
Image source: Delta.
Delta last announced a dividend increase in May 2016, delivering a hefty 50% boost to its payout, and another big raise in 2017 looks to be a safe bet. While the company does face potential headwinds related to fuel and workforce costs, Delta's business appears to be on track to continue generating strong cash flow. The company posted $4.1 billion in free cash flow over the trailing-12-month period, and its last-issued guidance projects that annual free cash flow over the next two years will come in between $4.5 billion and $5.5 billion.
Even if Delta falls short of that target range, as it did in the last fiscal year, the airline will still have ample room to boost its payout. Management plans to return at least 70% of free cash flow to shareholders annually and aims to have the company's $3 billion buyback program completed in May, which could free up more cash to be returned to investors in the form of dividend payouts.
With a forward price-to-earnings ratio or 9.4, a roughly 1.6% yield, and the likelihood of a big payout increase this year, Delta is worth a look for investors on the hunt for reasonably priced stocks that offer strong dividend growth potential.
