It can be tempting to hunt for dividend stocks based on their yields alone, but more often than not, a high yield can actually be a warning sign. That's because the best dividend-paying stocks not only offer investors income today, but also promise to greatly increase their payouts over time. The only way for a company to do that over the long term is to steadily grow profits.
Which income stocks could meaningfully increase their payouts in the years ahead? When asked that very question, these three Fool contributors picked General Motors (NYSE:GM), NextEra Energy Partners (NYSE:NEE), and MarketAxess Holdings (NASDAQ:MKTX).
Renewable energy's best long-term dividend
Travis Hoium (NextEra Energy Partners): The renewable-energy industry is growing at a rapid rate in the U.S., and one of its critical needs is financing. Wind and solar companies don't have low enough costs of capital to finance projects themselves, so they need to find buyers long term. Utilities have started to step in, but the advent of yieldcos was supposed to drive more available financing for the industry. And NextEra Energy Partners is one of the only yieldcos that looks like it's built to last over the long term.
What NextEra Energy Partners has going for it is a strong utility sponsor and a low dividend yield. The utility sponsor gives it access to projects it can buy along with what's available on the open market. And the low dividend yield means the company can issue new debt and shares to buy projects that will be accretive to the dividend long term. And that's what drives dividend growth.
The current dividend yield for NextEra Energy Partners is 4.25%, which isn't the best you'll find on the market, but management is projecting 15% dividend growth long term. In five years, the implied dividend -- after 15% annual growth -- would be 8.5%. That's a great dividend for tomorrow, especially for a company that owns projects that have contracted cash flows for 20 years or more.
Why this old industrial giant is a good bet on the future
John Rosevear (General Motors): You might be wondering why I'm recommending an old Detroit automaker as a "stock of tomorrow." After all, it seems like experts can't stop talking about the imminent disruption of automakers by electric-powered self-driving mobility pods. Why would anyone want to own General Motors' stock?
I think that's exactly why a smart investor might want to buy and hold GM. It's definitely true that electric vehicles and self-driving technology are emerging technologies that look likely to be dominant before too long. It's also true that at least some of the traditional automakers won't survive the transition to that future.
But CEO Mary Barra has GM positioned better than most of the old automakers -- and better than a lot of the much-touted new-tech entrants -- to thrive and profit in that emerging world. Consider:
- The world is watching Tesla gear up to launch its Model 3, but GM is already shipping a well-regarded mass-market electric vehicle with over 200 miles of range, the Chevrolet Bolt EV.
- GM subsidiary Cruise Automation's latest demos of its self-driving system show it to be quite advanced.
- GM owns 9% of ride-hailing company Lyft -- and GM and Lyft are planning a big test of self-driving Bolts (reportedly "thousands" of them) that will begin soon.
- GM owns the fast-growing urban car-sharing service Maven outright.
GM has been able to fund all that new-tech work because its "old" business is doing very well. GM's net income rose 34% in the first quarter from the year prior, to $2.6 billion, thanks to very strong demand for GM's trucks and SUVs in the U.S. and China. Its earnings before interest and taxes (EBIT)-adjusted profit margin was 8.2% in the quarter, strong for a mass-market automaker -- and Barra has a plan to boost it into the 9% to 10% range, sustainably, over the next couple of years.
That plan, which has been underway for a couple of years, has a ton of credibility because it's already working. Barra has argued that GM's stock is both a dividend play and a profit-growth story -- every quarter, there seem to be more reasons to think she's right.
Oh, and that dividend? It's rock-solid and yielding about 4.5% at current prices. Seriously, take a closer look at this one.
Dragging the bond market into the 21st century
Brian Feroldi (MarketAxess Holdings): Chances are good that you buy and sell stocks by placing orders with your broker online. You might assume, then, that the same thing happens in the bond markets, too. Believe it or not, that's not the case. In fact, the majority of institutional bond trading occurs through one-on-one transactions over email or by phone. As you can imagine, this methodology is rife with inefficiencies and transparency issues.
MarketAxess Holdings is on a mission to bring the fixed-income markets into the 21st century. The company created an electronic bond-trading platform years ago that makes it far easier for market participants to buy or sell fixed-income securities. This platform increases transparency and liquidity, and enables rapid trade execution that simply can't be matched by the traditional method of doing business. In turn, money managers around the world have welcomed MarketAxess' system with open arms and turned it into the leading electronic bond-trading platform in the world.
Size matters a great deal with trading platforms, and its size gives MarketAxess a huge leg up over its rivals. After all, buyers want to go to where the most sellers are -- and vice versa. Since MarketAxess is the top dog in this market, it is having no trouble attracting new users to the platform and winning market share. This scale advantage has attracted new customers to the company's platform for years and consistently lead to more trading volume. In turn, MarketAxess' financial statements to flourish.
Now that the company's platform is built out, management has turned its attention to rewarding shareholders. The company started paying a small dividend last year that yields 0.7% at current prices. That might not sound like much, but MarketAxess' profits and dividend are both poised for substantial growth in the years ahead as it continues to capture market share. That's why I believe that MarketAxess could be a great income stock for investors to pick up today.