One of the great things about stocks is that some offer investors both long-term price appreciation potential and dividend income. But picking the right dividend stocks is key to good long-term results. After all, what good is a stream of income if the stock price gets crushed or the payout is, at some point, reduced or even eliminated?
For investors who want to add some income to their portfolio, here is one company that isn't just paying a nice dividend to investors but is increasing its payout. Even more, it is paying out a fraction of its earnings in dividends, increasing the odds of more dividend growth in the future. The company we're talking about is cloud software specialist Oracle (ORCL -1.62%).
A big dividend increase
If the world is uncertain and the outlook is gloomy, you wouldn't know it by Oracle's recent dividend increase announcement. The company said in its fiscal third-quarter earnings release last week that it was increasing its quarterly cash dividend by 25% to $0.40. This translates to $1.28 annually, giving Oracle stock a dividend yield of 1.9%.
Though this dividend yield isn't substantial, investors should note that there's plenty of room for this dividend to grow in the coming years. Oracle has a payout ratio of just 41%. This means the tech company pays out less than half of its annualized earnings in dividends.
Investors should note, however, that Oracle hasn't made a habit of increasing its dividend every year. So investors shouldn't count on annual dividend increases, as many other dividend payers go about hiking their dividends. Oracle typically holds its dividend steady for two years before it announces an increase. Given how consistent the company has been with this practice historically, the odds are high that it will likely continue to do going forward.
A resilient underlying business
Importantly, Oracle's business is thriving. Revenue in its most recent quarter rose 18% year over year, or 21% in constant currency. This put total revenue for the quarter at $12.4 billion.
But what investors are likely particularly excited about is Oracle's growth in its cloud infrastructure and cloud application segments. Together, this cloud revenue increased 45% year over year to $4.1 billion in fiscal Q3. As separate segments, cloud infrastructure revenue soared 55% year over year, and cloud application revenue rose 42%. Investors are likely hoping Oracle's cloud revenue will contribute substantially to earnings growth over the next decade (this would provide good support for continued dividend income growth). The fast-growing segment is already large, with its revenue exceeding $16 billion on an annual run-rate basis.
Oracle's strong underlying business, conservative payout ratio, and a trend of dividend increases every few years make the tech stock look like a good dividend stock. Investors looking to add some dividend income to their portfolio may want to take a closer look at Oracle or at least put the stock on their watchlist.
