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An investor's best friend is a stock that not only pays a high dividend but has the potential for massive gains as well. After all, a 5% dividend combined with a 10% price increase translates to a 15% total return -- and this kind of performance can add up tremendously over time. We asked five of our contributors to tell us about some dividend stocks with room to rise, and here is what they had to say.
Selena Maranjian: A high-dividend stock to consider is Seaspan (ATCO), the shipping specialist. Its stock has slumped some 15% over the past year, which has helped push its dividend yield up ... to more than 10%! The company has a strong record, though, averaging annual gains of more than 10% over the past five years -- and growing its quarterly payout by about 25% annually, on average.
So, what does it actually do? Well, it buys and leases out container ships. Its leases tend to be long term and with fixed rates, giving it reliable income and making it less likely to encounter unexpected bumps and dips in its fortunes. Its managed fleet is large -- recently at 118 ships -- and growing, as it expects to add 18 to that number by the end of 2017. Better still, its fleet isn't too old, with an average age of 7. The fleet's average time remaining on its leases is about five years, too.
The company's business is rather sturdy, as the need for shipping is likely to stay with us for the foreseeable future. We live with a very global economy, and goods and supplies need to be transported across great distances as inexpensively and efficiently as possible. Seaspan's revenue has nearly doubled over the past five years, but all its numbers aren't perfect. Its share count has been rising recently, and it's free-cash-flow negative, due to rising investments. Its payout ratio tops 100%, too, suggesting that its dividend rate isn't sustainable over the long run unless earnings increase. Increased earnings are far from out of the question, though -- its growing fleet alone is likely to boost its bottom line. And even if Seaspan's dividend is slashed in half, it will still offer a solid payout.
Dan Caplinger: Feeding the world takes a lot of effort, and PotashCorp (POT) plays a key role in helping the agricultural industry boost its overall crop yields to make the most of their planting efforts. As its name suggests, PotashCorp is a leader in producing potash-based fertilizer products, and the stock boasts a dividend yield of 8.5%.
One reason why PotashCorp's yield has climbed so far is because it is suffering through a severe cyclical downturn in its market. After years of high crop prices, the agricultural industry has seen the commodity markets turn against it, as economic disruptions in key growth areas in Asia and Latin American have reduced international demand for potash fertilizer. In addition, disruptions in the fertilizer industry among key suppliers of potash to the global market have contributed to poor prices for PotashCorp's primary markets, further hurting profits and forcing PotashCorp to shutter some of its higher-cost mines.
PotashCorp's struggles might take a while to play out. But in the long run, the company still benefits from the need for fertilizer to provide food across the globe. With those demographic factors supporting it, PotashCorp has a lot of room for improvement in 2016.
Adam Galas: Thanks to the oil crash, and the resulting impact on energy stocks, shares of Kinder Morgan (NYSE: KMI) yielded a staggering 13% until earlier this week when the company slashed its dividend by 75%.
As background, cheap oil prices forced it to remove billions of dollars of CO2 projects from its backlog. In addition, the shares have become so cheap that management has said it's no longer planning to raise equity growth capital (through at least mid-2016) to fund the remainder of its $21.3 billion in new growth projects over the next five years. That's where the aforementioned dividend cut comes in.
The dividend hit greatly lowers the current dividend yield (now around 3%), but it allows Kinder Morgan to keep investing in its capital projects for the future, which will in turn potentially lead to dividend raises in the future. Hence, I believe Kinder Morgan represents a deeply undervalued and terrific way to profit from oil's unpredictable but, I believe, inevitable recovery.
Matt Frankel: One dividend stock I love right now is Toronto-Dominion Bank (TD 0.81%), known simply as TD Bank to most consumers.
TD Bank hasn't performed too well recently, down 18% year-to-date due to a combination of factors. Profit margins are lower across the banking industry, thanks to the low-interest-rate environment, and TD's exposure to energy-related lending has caused some concern among investors. Additionally, foreign-exchange fluctuations have hurt the stock's performance, as much of the bank's business is in Canadian dollars.
However, there are some good reasons to be bullish on "America's Most Convenient Bank." For one thing, although the trend has been toward online and mobile banking, TD recognizes the importance of a broad but efficient branch network. The bank has been steadily expanding its branch network into high-potential markets, but its new branches have less square footage than older ones, require 32% fewer FTE (full-time equivalent) workers, and cost 34% less to operate.
And the bank has some ambitious growth plans. Just to name a couple of the initiatives, TD anticipates adding $500 million in new credit-card revenue over the next few years and plans to grow its wealth-management business at a double-digit annual rate.
With a record of financial responsibility, ambitious growth, and consistent profitability, TD has managed an 11% average total return for its shareholders over the past 15 years. While the stock may not skyrocket to new highs overnight, I firmly believe that the bank's best days are still ahead of it. In the meantime, you'll be paid a 3.8% dividend while you wait -- among the highest in the banking sector.
Jason Hall: I feel like I've been beating the drum for National-Oilwell Varco, (NOV -0.85%) for so long my hands should be numb. But as long as this solid, well-capitalized, and critically important company for oil and gas production remains so beaten down, I'm gonna keep it up.
First, the risks that this oil and gas drilling and production equipment maker faces shouldn't be taken lightly. NOV, as the company is known, makes a living supplying drilling equipment for both offshore and onshore oil and gas -- and, frankly, there are too many rigs operating as it is. In other words, the company's rig systems business isn't likely to bounce back overnight.
But that's not the same thing as a death knell for the company -- far from it. After all, there are still thousands of drilling rigs operating, and those rigs must be maintained for both safety and productivity reasons, and NOV's rig aftermarket business has stabilized, and stands to bounce back strongly in 2016 as producers deplete their parts and supplies inventories and have to start spending money on those items again.
While not a traditional "blades and razors" business, NOV does count on a strong recurring revenue base that will get this stalwart through the downturn. Even with earnings well down over the past year, the company still produces plenty of cash flows to sustain its (nearly 5%) dividend. But eventually the rig market will recover, and when it does, NOV will be set to be a huge winner.
