Dividend stocks can be the foundation of a great retirement portfolio. Dividend payments not only put money in your pocket, which can help hedge against any downward moves 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. By examining the payout ratio -- the percentage of profits a company returns to shareholders as dividends -- we can get a good read 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%, which could potentially double their dividends.
Forget what the idiom says -- sometimes you can have your cake and eat it too! I'd suggest income investors who want dividend growth take a much closer look at Cheesecake Factory (CAKE -1.96%).
There are a number of factors working in the Cheesecake Factory's favor that could lead to substantial dividend growth in the coming years. The company is currently paying out $0.80 annually, a 1.7% yield at current share prices. My suspicion is this could grow to $1.60 or beyond per year within the next decade.
The first point working in favor of the Cheesecake Factory is lower input costs. Commodity-based food costs hit nearly a seven-year low late last year, spurred by oversupply and a slowdown in China's economic growth. Lower costs allow restaurants' margins to expand. Meanwhile, lower oil prices have decreased prices at the pump for consumers, thus boosting discretionary spending. It's the perfect perpetuating cycle (for now) for the Cheesecake Factory.
Secondly, Cheesecake Factory's menu works to its benefit. Although some restaurant chains have struggled with their expansive offerings, Cheesecake Factory uses its large menu to its advantage. McDonald's, for instance, has had to shrink its menu, because it was slowing down response times in the kitchen and potentially confusing its customers. Cheesecake Factory, though, is appealing to multiple palates with its cuisine. Furthermore, because it is a moderately upscale restaurant chain, its customers are willing to wait for what can at times be a very busy kitchen and dining room.
Finally, Cheesecake Factory has a strong, smart management team. As noted by Business Insider last year, the Cheesecake Factory's kitchens are set up like a true "manufacturing facility" that helps get orders out as fast as possible, and ensures that the food is fresher. It also uses 98% of the food it buys, making sure that little goes to waste. It also doesn't hurt that its management team is very careful about what markets it expands into.
Next up, I'd suggest dividend investors turn their attention to the technology sector and dig a bit deeper into material science giant Corning (GLW -2.37%).
In recent years, Corning has demonstrated a lot of promise, but it's also been the victim of weaker pricing. The majority of Corning's business comes from its display technologies segment, of which LCD glass represents the largest chunk. Unfortunately for Corning, LCD pricing has been under perpetual pressure as competition picks up and television prices have dropped.
However, this weakness could also be a positive in disguise for Corning. While Corning expecting LCD glass prices to decline further in 2016, it's expecting demand to grow by a low single-digit percentage. The reason? The size of the average television is growing larger, prices are falling, and with fuel prices down, consumers have more money in their pockets. As long as LCD glass prices find a floor soon, volume growth in television sales should more than counteract the impact of price declines for Corning.
Another key point is that Corning has Gorilla Glass in its back pocket as a long-term growth driver. Gorilla Glass is a thin, light, and highly scratch- and chip-resistant glass developed by Corning for use in smartphones and other devices. As noted by my Foolish colleague Steve Symington, Corning invested more than $800 million in South Korea to bolster its Gorilla Glass production lines. The expansion of smartphones worldwide, as well as Gorilla Glass's possible expansion into other electronic devices, as well as automobiles, gives Corning the belief that demand will be very strong for years to come.
Lastly, it's worth pointing out that Corning already has an aggressive capital return plan in place. Earlier this month, it announced it was increasing to its quarterly dividend by a 12.5% to $0.135, which builds upon its capital allocation strategy from October. Overall, Corning plans to boost dividends by at least 10% annually through 2019. It's certainly not out of the question that Corning could be paying $1, or more, annually within the next decade.
Opus Bank's niche is to serve as a lender to small- and medium-sized businesses across a variety of industries. Don't get me wrong, Opus is a retail and commercial banking entity, too, like many of its peers, but its focus on smaller businesses allows it to establish a close-knit relationship with its clients. Based on Opus' fourth-quarter results, practically everything is going its way.
New loan funding hit a record for Q4 at $763.1 million, a 20% increase from the prior-year quarter, with its commercial and specialty banking segment accounting for 54% of newly funded loans. Additionally, new loan generation from small- and medium-sized businesses helped Opus expand its net interest margin sequential by six basis points to 3.86% in Q4 from Q3. The company ended the year with $6.6 billion in total assets, up from $5.1 billion at the end of 2014.
But it's not just the scope of the numbers; it's the quality and outlook that are also impressive. In terms of credit quality, nonperforming assets totaled a reasonably low 0.37%, rising on a year-over-year basis due solely to one client. Further, its ratio of allowance for loan losses to total loans was just 0.8%. In other words, Opus Bank's customers are repaying their loans in a timely manner.
Looking ahead, Opus Bank stands to benefit from the Federal Reserve keeping benchmark interest rates low for the foreseeable future. While a low interest rate environment is generally bad for banks, as it saps their interest-based income, Opus can benefit since access to cheap capital is giving a lot of businesses incentives to expand. Opus Bank has all the tools necessary to be a go-to lender for these businesses.
Slated to surpass earnings of $4 per share in in the coming years, yet paying out only $0.60 a year, Opus Bank looks like a strong candidate to double its dividend.