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2 Attractive Dividend Stocks Whose Dividends Could Double

By Matthew Frankel, CFP® - Apr 14, 2017 at 3:47PM

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These two stocks can provide growth and rising income in your portfolio.

With the stock market just under record high levels, it's getting tougher to find attractively priced stocks to buy. However, there are still cheap dividend stocks to be found -- you just need to look closely. Here are two stocks that not only look like attractive bargains, but pay dividends that could easily double in the not-too-distant future.

This bank still has a lot to gain under the Trump administration

Bank of America (BAC 1.38%) has come a long way since the financial crisis, and its share price is finally starting to reflect that fact. Over the past year, shares of the bank are up 77%, including a 35% spike since the November election, as investors feel the bank could benefit under the Trump administration's platform of looser regulations and the general environment of job and wage growth that's expected.

Dollar bill with the word "dividends" in the middle.

Image source: Getty Images.

In addition, Bank of America could be a huge beneficiary of rising interest rates. In its latest annual regulatory filing, the bank said that a 100-basis-point increase in interest rates would translate to an additional $3.4 billion in net interest income per year. Since the Federal Reserve has projected a series of rate hikes over the next few years, Bank of America's profitability could rise quickly.

In the wake of the financial crisis, Bank of America was forced to cut its quarterly dividend to a penny per share. Since then, the bank has prioritized returning capital to shareholders; however, this has mostly come in the form of share buybacks. And it makes sense -- for much of the past few years, Bank of America's stock was trading for a steep discount to its book value, so it seemed like the smartest move was to aggressively buy back shares while they were cheap.

Since 2013, Bank of America has spent $12.4 billion on share buybacks, and after the recent rise in the share price, this seems to have been a wise decision.

As a result, the dividend did increase (currently $0.30 per share per year, a yield of 1.2%), but became second in importance to the buybacks. Now that shares are trading at a level at which buybacks aren't an immediate value-adder, it seems like the focus for returning capital is shifting. In fact, CEO Brian Moynihan emphasized the bank's "focus on increasing" its dividend several times in his recent annual letter to shareholders.

A young REIT that doesn't pay a big dividend -- yet

Real estate investment trusts, or REITs, are known for their high dividend yields, so it may come as a surprise that residential REIT American Homes 4 Rent (AMH 0.31%) pays a dividend of less than 1%.

Most residential REITs specialize in multifamily properties, particularly apartments. However, American Homes 4 Rent takes a different approach, specializing in single-family homes. At the end of 2016, American Homes 4 Rent owned 48,422 homes in 22 states, and had a solid 95% occupancy rate.

My favorite thing about American Homes 4 Rent is its growth potential, as the single-family rental market is still in the early innings of becoming a REIT-owned property type. There are only three publicly traded REITs that specialize in single-family homes, and with a $5.5 billion market cap, American Homes 4 Rent is the biggest by a wide margin. Meanwhile, the market for single-family rental homes is well over $1 trillion in size. From a growth and consolidation standpoint, an industry whose leader has less than a 0.5% market share is about as fragmented as it gets.

The dividend is rather low, but there's reason to believe that it won't remain that way for long. For starters, the company has lots of opportunities to grow its income, as I discussed earlier. And the dividend as it stands now is covered by the company's funds from operations (FFO -- the REIT version of "earnings") about five times over. Plus, with a low 29.1% debt-to-capitalization ratio and nearly $800 million in liquidity, the company is financially solid enough to allow for the dividend to be comfortably increased.

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Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$31.56 (1.38%) $0.43
American Homes 4 Rent Stock Quote
American Homes 4 Rent
AMH
$35.55 (0.31%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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