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. Dividends also give investors a painless opportunity to reinvest in a stock, thus boosting future payouts 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.
This week we'll start off with a company that's well-known in many American households: coffee giant Starbucks. Currently paying out $0.80 on an annualized basis, good enough for a 1.4% yield, it's my belief that Starbucks could jump its payout to $1.60 on an annualized basis sometime within the next decade.
For starters, Starbucks' innovation keeps it on the cutting edge, and it creates a very loyal customer base (says the author who's been drinking Starbucks coffee for 19 years and counting). Starbucks' introduction of healthier food options speaks to a customer base that wants food perceived to be more nutritious, and it seems to be adding new drinks to its menu practically every quarter, including the introduction of alcoholic beverages in select markets. Focusing on both the quality of its products and the experience of going to Starbucks has afforded the company the ability to raise its prices and handily outpace inflation.
Another benefit for Starbucks, at least in the near-term, has been the precipitous drop in coffee prices over the past year and change. Since peaking around $2.20 per pound in October 2014, coffee prices last checked in at $1.19 per pound. As noted above, consumers head to Starbucks for the drink selection, nutritious food choices, and the experience. They typically aren't going to Starbucks based on price, because less-expensive coffee can be found at many of its rivals. When coffee prices fall, Starbucks is simply able to pocket more in profits.
Overseas markets are also a long-tail growth opportunity for Starbucks. The current plan is to practically double the number of stores the company has in China from roughly 1,700 to 3,000 over the next four years, as well as enter a number of untapped markets. It's unclear if Starbucks can translate its strength in the America's into emerging markets, but if its history is any indication, it should do just fine.
As one of the world's strongest and best-known brands, I'd look for Starbucks to grow into a dividend stock that income investors grow to love.
Lincoln National Corporation (NYSE:LNC)
Income investors looking for an attractive stock that has the potential to double, or perhaps even triple, its dividend in the coming years would be wise to pay close attention to financial products firm Lincoln National.
The key to Lincoln National's success is its diversity. For example, Lincoln Financial has a number of annuity products it can offer its clients to protect and enhance their wealth over their lifetime. When stock market volatility picked up in August 2014, Lincoln saw a spike in fixed annuity sales. When volatility calmed down, variable annuity sales once again picked up. Lincoln is using its vast annuity products to remove some of the risk it faces from interest rate and financial market volatility, and in the third quarter that translated into 6% net income growth for its annuity franchise.
Beyond annuities, I've come to appreciate Lincoln National's life insurance segment as well. Like most life insurers, Lincoln National is bound to face higher claims costs from time to time. However, also like most life insurers, it tends to price its products in such a way that it outpaces inflation and always remains prepared for any exceptionally high claim expenses. Insurers can also benefit from a rising rate environment by reinvesting their pool of premiums received in short-term, safe, interest-bearing assets, further boosting profitability.
Currently paying a $1 annualized dividend (2.2% yield), but projected to earn more than $6 in EPS in fiscal 2016, Lincoln National looks to be a solid candidate for a large dividend increase in the coming years.
B/E Aerospace (NASDAQ:BEAV)
Lastly, I'd turn your attention to B/E Aerospace, a manufacturer of cabin interior products for commercial and business planes.
The past year has been rough for B/E Aerospace, with its share price dipping from $64 to below $40. Whereas falling oil prices have been great news for airlines looking to cut costs, it's not such great news for airline parts suppliers if orders for new planes could be stymied. With less of an incentive to buy more fuel-efficient planes, investors are clearly worried about B/E Aerospace's near-term outlook.
As for me, I'm not concerned. The way I view it, B/E Aerospace can prosper regardless of what oil does. Even if lower oil and jet fuel costs weigh on intermediate orders, it's not as if global long-term oil demand is headed lower. I consider this drop in oil prices to be somewhat temporary. Plus, if demand for new planes drops, we could also see prices for new planes fall as well. Should that happen, demand might once again pick right back up. This means B/E Aerospace's products, such as seats, lavatories, and ovens, should remain in strong demand.
Access to cheap capital is another strong component of why B/E Aerospace has performed so well, and should continue to do well. The Federal Reserve kept lending rates at historic lows for roughly seven years. Even with its December hike of a quarter percentage point, it's not as if access to a loan suddenly became egregiously expensive. Access to cheap capital continues to make capacity expansion a high priority for many airlines, and that bodes well for B/E Aerospace.
Currently paying out $0.76 annually (a 1.9% yield), but forecast to grow its EPS from $3 in fiscal 2015 to more than $4 by 2018, I'd proclaim B/E Aerospace a good candidate to double its dividend payout sometime in the next five to 10 years.