Many investors rely on stocks that pay dividends to get much-needed income. Yet you can find plenty of companies that could easily afford to pay a lot more money to their shareholders in dividends, yet for whatever reason, they choose not to do so. Sometimes, those stocks are still good investments, with great capacity for share-price appreciation as well as future dividend hikes.
To identify a few promising prospects for your consideration, we asked three Motley Fool contributors to choose companies they see as being solid candidates for having the ability to raise dividends in the future. Read on and then tell us what you think about whether these stocks deserve a place in your portfolio.
Matt Frankel: One company that could easily double its dividend yield is Goldman Sachs (NYSE: GS). Goldman pays an annual dividend amount of $2.40 per share, which is just 14% of the company's 2014 earnings. In fact, Goldman Sachs has only paid out more than 15% of its earnings twice in the past decade.
However, while Goldman could easily double its dividend, I don't think it will happen anytime soon. Goldman prefers to use its profits in two ways: reinvesting in its business and buying back shares. Buybacks are definitely Goldman's preferred method of returning capital to shareholders. In fact, Goldman has about 19% fewer outstanding shares than it did in 2011 and has been buying back shares at a rate of more than 6% per year recently.
By choosing to buy back shares rather than increase its dividend, Goldman could be telling us that management believes shares are a good value at the current price and that shareholders will get more value from buybacks than they would from a dividend increase. So I hope Goldman's dividend stays low and the buyback stays high for years to come.
Jordan Wathen: Visa (NYSE: V) stands out to me as one stock with a long runway for future dividend increases. Over the next few years, I could see its dividend doubling, or even tripling.
The company is a cash cow unlike any other. Less than 10% of its operating cash flow is spent on capital expenditures -- big, long-term investments -- in any given year. Yet even though it doesn't invest much in its business, revenue is up 60% in the past five years on the back of a shift from cash to card-based payments. Payment processing is a rare industry where growth in revenue and profits does not require proportionally large ongoing investments.
The company returns nearly all of its cash flow and earnings back to investors in the form of dividends and share repurchases, with share repurchases making up the majority of its capital returns. But as time goes on, and its valuation grows, I find it likely that the company will start directing more of its payouts to dividends over repurchases. After buying back more than 50% of its split-adjusted diluted shares since its IPO, its stock is becoming less liquid. Institutions own more than 90% of its float, which limits how much stock it can buy back without driving up the price.
For these reasons, I think Visa will have one of the best dividend growth rates of any publicly traded companies over the next decade, if not longer.
Dan Caplinger: One company that's in spectacular shape for raising its dividend is entertainment giant Disney (NYSE: DIS). The multimedia empire has grown impressively in recent years, with the acquisitions of studios including Pixar, Marvel, and most recently Lucasfilm having bolstered Disney's already impressive content collection. Marvel in particular has spawned numerous successful franchises, including multiple blockbuster movies based on Iron Man and Avengers. Lucasfilm has at least that much promise, with future installments of the Star Wars franchise having almost limitless potential.
For all of Disney's profitable success, the company is notoriously stingy with its dividends. The stock's current yield sits at just 1.1%, and the company pays out just a quarter of its earnings per share in annual dividends. To be fair, Disney has more than tripled its payout in the past five years, but growth in its share price has prevented Disney from seeing any appreciable increase in its yield. It would be trivial for Disney to double its dividend right now and still maintain a healthy payout ratio of around 50%, leaving it plenty of room to make further strategic acquisitions or other investments in its business. Unfortunately, it's more likely that the House of Mouse will simply persist with its slow but steady increases in its once-yearly payouts, making dividend investors wait patiently to share in the company's success.