Dividend stocks are often the foundation of a great retirement portfolio. Dividend payments not only put money in your pocket, which can help hedge against any downward move in the stock market, but they're usually a sign of a financially sound company. Dividend payments also give investors the opportunity to reinvest into more shares of stock, thus boosting future dividend payments and compounding gains over time.
Yet not all income stocks live up to their full potential. Utilizing the payout ratio, or the percentage of profits a company returns in the form of a dividend to its shareholders, we can get a good bead on whether a company has room to increase its dividend. Ideally, we like to see healthy payout ratios between 50% and 75%. Here are three income stocks with payout ratios currently below 50% that could potentially double their dividends.
If your income portfolio is hurting and you could use some assistance, what stock should you call upon? I'd say supplemental income insurance giant Aflac might be a good idea.
One critical factor that some investors will fail to overlook is that Aflac's insurance business is tied at the hip to the Japanese market. Japan accounts for around three-quarters of Aflac's total revenue, with the U.S. accounting for the remainder. Because Aflac reports in U.S. dollars, it's required to translate its Japanese yen into U.S. dollars. However, the yen lost nearly 15% of its value relative to the dollar year-over-year. On a top-line basis Aflac's third-quarter revenue dropped 12.1% from the year-ago period -- but remove the currency fluctuations over which Aflac has no control and Aflac's operational growth remains steady.
One of my favorite aspects of insurers is their ability to price themselves into profits. Insurers are simply preparing for the inevitable catastrophe that'll require them to make good on numerous claims. Pretty much every insurer will find themselves temporarily in the red at some point due to the high costs of a natural disaster or catastrophe of sorts. But insurers prepare for this by ensuring that their premium price hikes are outpacing the growth of inflation, and by investing their float (premiums received that haven't been paid out as claims) in short-term, safe, interest-bearing vehicles. The combination of strong pricing power and the Federal Reserve finally raising rates bodes well for Aflac and its investment income moving forward.
Aflac is also a Dividend Aristocrat. In other words, it's part of an elite group of just over four-dozen publicly traded companies that've increased their dividends for at least 25 straight years. In Aflac's case it's raised its dividend for 33 straight years, and is currently paying out $0.41 per quarter ($1.64 annually). Looking ahead, Aflac looks to be on pace for multiple years of $6 (or more) in annual EPS, providing more than enough room for ongoing dividend increases, including a potential double to $3.28 annually.
Jack in the Box (NASDAQ:JACK)
Shifting gears to the service sector, if you're looking for a company with strong dividend growth potential I would look no further than Jack in the Box. Known for its namesake fast food restaurant chain, Jack in the Box also owns Mexican fast-casual chain Qdoba.
For quite some time Jack in the Box was merely trying to make a name for itself in fast-casual dining, but more often than not it emulated what made its larger foes successful. For example, McDonald's transformation of the interior of its restaurants to make them more inviting for families (the installation of TVs, new décor, and free Wi-Fi) led to a boon in customer traffic. Jack in the Box followed by updating the interior of its restaurants, which also led to a traffic increase.
However, the days of being a follower are long gone. Jack in the Box is now a trendsetter in the fast-casual space. Jack in the Box's all-day breakfast has been a growth driver for years, allowing the company to establish a loyal customer base during the breakfast and late-night hours. Its Qdoba franchise is also likely taking advantage of the recent weakness in Chipotle Mexican Grill, caused by a number of instances of E. coli scares at various locations.
Looking ahead, Jack in the Box and Qdoba are expected to bring 2% to 4% same-store sales growth to the table in 2016, which follow same-store sales growth of 6.5% for company- and franchised-owned Jack in the Box restaurants, and 9.3% for company- and franchise-owned Qdoba locations in 2015.
Currently sporting a $1.20 annual dividend, Jack in the Box's 1.6% yield is at the point where income investors begin to get interested. But with more than $4 in EPS expected in 2017 and beyond, it's reasonable to think that Jack in the Box could effectively double its dividend to $2.40 annually. Investors should keep in mind that Jack in the Box tends not to get too aggressive with its dividend since the costs of opening new locations and remodeling its stores can be high, but a dividend double over the next decade seems doable in my opinion.
Sealed Air (NYSE:SEE)
Lastly, we'll stick with the consumer services sector and turn our attention to a company that offers slow but steady long-term potential: Sealed Air.
You may not be familiar with the company, but you've likely used one of its products before. This is a company that predominantly makes packaging products, such as Bubble Wrap, and it also handles food storage, such as with its Cryovac bags. Growth in packaging and food storage isn't exactly lightning fast, but through acquisitions that diversify its product line, strong pricing power as defined by its dominance in a niche category, and the expectation of a growing and more demanding population, Sealed Air's long-term growth outlook appears solid.
Like Aflac above, if investors don't dig deeper than Sealed Air's initial headlines, they'll mistake the company's recent sales weakness as a sign of trouble. Recent divestments in its food care business, as well as the negative effects from currency translation in emerging markets, have created the illusion of a steep net sales decline. In reality, Sealed Air is actually growing by a low-to-mid single-digit percentage on an organic basis once the white noise is removed.
At the moment Sealed Air is paying out $0.52 annually, but it could be delivering well over $3 in EPS by 2018, giving this slower growth company plenty of room to potentially double its payout and attract income-seeking investors.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of and recommends Chipotle Mexican Grill. It also owns shares of Sealed Air and recommends Aflac. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.