Dividend stocks can be the foundation of a great retirement portfolio. Not only do dividend payments put money in your pocket, which can help hedge against any dips 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. Using 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.
To start this week, let's have a closer look at the king of all do-it-yourself retailers, Home Depot (NYSE:HD), which reported stellar fourth-quarter results just last week.
For the quarter, Home Depot announced $21 billion in sales, or a nearly 10% increase in sales from Q4 2014, with comparable-store sales up a ridiculous 7.1%. Comparable-store sales strip out newly opened stores and closed stores to give investors a cleaner picture at how stores that were opened at this time last year performed this year. What we're seeing is a growth rate of 7.1% from a company with 2,274 retail stores.
How has Home Depot managed to be so successful? Primarily, it has to do with Home Depot's ability to hit both channels of the market: commercial and retail/residential. When the housing market is growing and housing prices are rising, much as we're seeing now, Home Depot tends to lean on the commercial side of its business to drive growth. When growth slows down, which tends to reduce the desire to move, Home Depot relies on its consumers and their desire to remodel to drive its top and bottom lines. With interest rates near record lows, contractors, homebuilders, and the consumer all have access to cheap capital to build homes, remodel, or add on to an existing home. It's really the perfect environment for Home Depot to succeed.
In-store improvements have been another differentiating factor. Home Depot took the time to upgrade its point-of-sale systems, its online website for Internet shoppers, and its staff by better educating them on the products they were selling. The result is a better experience for the consumer. Last year, Home Depot announced it would be deploying 40,000 next-generation FIRST phones that would allow sales associates to check a customer out no matter where they were in the store. The move should personalize service within its stores, reduce the wait time to pay for goods, and it subtly reminds consumers about the ease of ordering online, which is an area where Home Depot has witnessed substantial growth.
In 2016, Home Depot has already announced a 17% dividend increase to $0.69 per quarter, or $2.76 annually. With the company looking to continue paying out around 50% of its earnings in the form of a dividend, I'd like to think Home Depot has a path available to double its EPS over the next decade (and thus double its dividend payment). This is a strong retail name worth considering for your income portfolio.
Up next, I'd suggest income investors turn their attention to Ireland-based Ingersoll-Rand (NYSE:IR), a provider of heating, ventilation, and air conditioning (HVAC) products and services, as well as power tools and rough-terrain vehicles for the industrial sector.
In Ingersoll-Rand's recently reported fourth quarter, organic revenue jumped 3% to $3.33 billion, with a slightly better performance within the U.S. (organic growth of 4%). As has been the case with other U.S. multinationals, Ingersoll-Rand dealt with adverse currency effects in overseas markets which dragged on its sales and profitability. When adjusting for its restructuring, operating margins also improved 50 basis points from Q4 2014 to 11.3%. Looking ahead, Ingersoll-Rand expects organic revenue growth of 3% to 5% in the first quarter of 2016. In short, fundamentally Ingersoll-Rand looks healthy.
What's fueling this success appears to be many of the same factors that have helped Home Depot. Low lending rates have given businesses cheap access to capital, which is leading to business expansion. New buildings provide opportunities for Ingersoll-Rand to sell and service HVAC systems, as well as provide power tools to contractors. I would assume that as long as lending rates remain low and global growth keeps ticking higher, Ingersoll-Rand's margins and organic growth will improve at a steady pace.
Lastly, the removal of a number of gray clouds has helped improve Ingersoll-Rand's outlook. In Dec. 2015, the Congressional Joint Committee on Taxation reviewed, and took no objection to, Ingersoll's agreement with the IRS to resolve disputes between intercompany debt, resulting in a charge of $227 million in Q2 2015. Also, Ingersoll's divestment of Hussmann for net proceeds of $425 million is expected to be completed by the first half of 2016. Along with Ingersoll's cost-saving measures, we're seeing a leaner, meaner Ingersoll-Rand.
Sporting a 2.4% yield, the $1.28 Ingersoll is currently paying out each year translates to just a 33% payout ratio based on the $3.89 Wall Street expects it to report in fiscal 2016. If its full-year EPS pushes past $5 by 2019, shareholders could be in line for a substantial dividend increase.
Finally, we'll keep with our large-cap and megacap theme this week and take a look at why payment processing facilitator Visa (NYSE:V) should be a name income investors are considering for their portfolios.
Like the aforementioned companies, it was business as usual for Visa in the first quarter. Net operating revenue rose by 8% on a constant currency basis (Visa dealt with a 3% currency headwind in Q1 2016), with service revenue, data processing revenue, and international markets all improving, However, Visa did note that its cross-border volume could potentially be constrained by growth uncertainty in overseas markets in the near-term. Nonetheless, payments volume growth of 11% to $1.3 trillion is nothing to sneeze at, and seemingly little cause for worry.
What makes Visa such an attractive company for the long term is the fact that most transactions around the globe (about 85%) are still be conducted in cash. Using plastic may be as commonplace as brushing your teeth in America, but Africa, the Middle East, and Southeastern Asia offer a decades-long growth opportunity since these regions are mostly untapped. Considering that few payment processing facilitators have the capital, infrastructure, or brand-name that Visa has, it seems like a smart company to just buy and hang onto for years.
Also working in Visa's favor is that it purely acts as a payment facilitator and not a lender. During periods of strong economic growth, Visa's peers that also act as a lender can double dip, earning money on the amount they lend via credit cards, while also banking on merchant transactions. However, these same peers struggle when economic growth slows as credit delinquencies can sometimes rise. Visa doesn't have to worry about credit delinquencies since it isn't a lender. This tends to lessen the volatility in its growth trend.
Currently paying out $0.56 annually but projected to bring in $4.40 in full-year EPS by 2019, I believe there's a better than 50-50 shot that we're going to see significant dividend growth in Visa's future.
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.
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