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3 Great Income Stocks that Could Double their Dividends

By Leo Sun - Apr 19, 2020 at 4:00PM

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These three companies might not pay the highest yields now, but their stable businesses and low payout ratios indicate that they could pay much higher dividends in the future.

The COVID-19 pandemic is rattling investors' faith in dividend stocks as companies cut or suspend their payments to preserve cash. However, investors should still keep an eye out for dividend stocks with healthy cash flows and low payout ratios.

Last month I highlighted three income stocks that could easily double their dividends. Today, I'll add three more stocks to that list: STMicroelectronics (STM -1.09%), Skyworks Solutions (SWKS 0.06%), and Sony (SONY -1.39%).

Cash growing on a tree.

Image source: Getty Images.

Europe's largest chipmaker: STMicroelectronics

STMicroelectronics, commonly called ST, is Europe's largest chipmaker. It produces a wide range of chips for connected cars, industrial machines, and consumer electronics.

Its automotive and discrete chip business, which generated over a third of its revenue last quarter, has been struggling with sluggish auto sales worldwide. However, stronger sales of analog chips, microcontrollers, imaging chips, and micro-electromechanical systems (MEMS) from other markets partly offset that slowdown.

ST's revenue and earnings dipped 1% and 19%, respectively, last year. Analysts expect its revenue to stay flat this year as its earnings drop another 10%, and it could still struggle to hit those targets as the COVID-19 pandemic hurts various industries worldwide.

However, ST's prospects could brighten next year as the cyclical headwinds wane and demand for its chips across multiple industries -- including low-emission cars and next-gen smartphones -- rises again. Until then, ST is paying investors a forward dividend yield of 1.1%.

ST hasn't raised its dividend for years, but it only spent 18% of its free cash flow (FCF) on those payments over the past 12 months. ST's FCF dipped 6% last year, but it still has plenty of room to significantly raise (or even double) its current dividend.

A top Apple supplier: Skyworks Solutions

Skyworks sells various wireless chips for the mobile, automotive, broadband, wireless infrastructure, home automation, industrial, and military markets. Its top customer is Apple (AAPL 0.00%), which accounted for over half of its revenue last year.

Apple's iPhone 11.

Image source: Apple.

Skyworks' stock tumbled earlier this year after Apple withdrew its second-quarter guidance as the pandemic disrupted its supply chains and retail stores. However, Apple's headwinds in China are waning, and it recently launched a new entry-level iPhone to attract new users.

Skyworks also recently posted preliminary second-quarter numbers that exceeded the midpoint of its own revenue forecast and matched its earnings guidance. Skyworks still faces plenty of headwinds, but those recent developments indicate its business will recover quickly after the COVID-19 crisis ends.

Until that happens, investors can collect Skyworks' forward yield of 1.9%. It's raised that dividend annually for five straight years, but it spent just 35% of its FCF on that payout over the past 12 months -- which leaves it plenty of room for bigger dividend payments.

A Japanese conglomerate with irons in the fire: Sony

Over the past year, Sony offset the slowdowns in its gaming and consumer electronics businesses with the growth of its image sensor business, which provides chips for roughly half of all smartphone cameras worldwide. That business has been booming as smartphone makers install more cameras in each device.

Sony recently streamlined its consumer electronics business to cut costs, especially at its struggling smartphone and TV divisions, and its gaming business should return to growth next year after the PS5 launches in late 2020. Its streaming music business should also remain stable and offset some of the losses at its pandemic-impacted movie division.

Simply put, Sony's strengths should outweigh its weaknesses until the crisis passes. During this period, Sony should consider raising its paltry forward dividend yield of 0.6% to reward patient investors. Sony has raised its dividend for four straight years, but it spent just 6% of its FCF on its dividend over the past 12 months.

Therefore, Sony could easily afford to double, triple, or even quadruple its current dividend. Doing so would win over more income investors and set a floor under the stock as it weathers the near-term headwinds.


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Stocks Mentioned

Sony Corporation Stock Quote
Sony Corporation
$84.45 (-1.39%) $-1.19
Skyworks Solutions, Inc. Stock Quote
Skyworks Solutions, Inc.
$98.09 (0.06%) $0.06
STMicroelectronics N.V. Stock Quote
STMicroelectronics N.V.
$33.47 (-1.09%) $0.37
Apple Inc. Stock Quote
Apple Inc.
$141.66 (0.00%) $0.00

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

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