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, 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.
However, 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.
We'll begin this week by taking a closer look at Stryker (NYSE:SYK), a medical devices company that develops everything from hip and joint replacements to neurosurgical and neurovascular devices.
For Stryker, there are two primary concerns. First we have the Affordable Care Act, better known as Obamacare. Following the implementation of Obamacare, some hospitals and consumers hung onto their cash and put off equipment purchases or elective procedures because of uncertainties regarding pricing and reimbursement. Additionally, there are concerns that cuts to Medicare and Medicaid could weigh on Stryker's results.
While far from a highflier, Stryker does have attractive attributes income investors may want to consider. For starters, the entire medical device industry should have a long-tail growth opportunity. Presumably, demand for devices should increase as the U.S. and global population ages. With few exceptions, life expectancies around the world are on the rise. This would mean as domestic and global access to medical care improves, the demand for surgical products and devices is likely to increase in step. This would bode well for Stryker, one of the largest device makers in the world.
Another pivotal point is that the medical device excise tax, a 2.3% tax levied on top-line sales of medical devices, has been suspended for two years based on the latest budget passed by Congress. For the next two years, that means more money in Stryker's pockets. Furthermore, with Americans going to the polls this November to elect a new president, it seems unlikely the medical device excise tax will ever be reinstated once its suspension is over.
Finally, Stryker has been using its operating cash flow, which has ranged between $867 million and $1.89 billion each year over the last decade, to fund its growth-by-acquisition strategy. For instance, last month, Stryker announced the purchase of Sage Products from a private equity firm for $2.78 billion to get a hold of surgical items that help prevent the spread of infection for hospital patients. The deal also comes with a juicy $500 million tax benefit for Stryker. Growth by acquisition is a quick way to boost diversification for Stryker.
Currently paying out $1.52 annually (a 1.5% dividend yield), but projected to generate $7+ in EPS by 2019, Stryker is a company income investors should have their eyes on.
J&J Snack Foods
I hope you're hungry for another dividend growth story, because next we're turning our attention to consumer goods mid-cap J&J Snack Foods (NASDAQ:JJSF), which supplies snacks and beverages to the food service and retail supermarket outlets.
What would be the biggest knock against J&J Snack Foods? Arguably the biggest problem right now might be getting over its near-term valuation. Sales in the company's latest quarter increased by a healthy 5% to $222.8 million, but investors are looking at a high forward P/E of 25. Its overall PEG ratio of 2.7 could certainly keep value investors or short-term-minded investors away.
But, I believe you can overlook J&J Snack Foods' potential overvaluation in the near term considering the consistent growth it can offer over the long run.
First, we're talking about a company with a diverse product line that's littered with a handful of brand-name products. For example, you'll find its SuperPretzel products in movie theaters, ICEE beverages in various retailers and restaurants, and frozen Minute Maid juice bars (even though Minute Maid is a registered trademark of Coca-Cola) in supermarkets. By focusing on its brand power, J&J Snack Foods is finding ways to engage with consumers and help them form attachments to these brands.
Another important component to J&J Snack Foods' success is that snack growth is being driven higher by millennials. Snacks accounted for around 40% of the $370 billion in U.S. packaged food market sales in 2014 -- and this figure is expected grow by 2% per year through 2019. If demand remains high among millennials, then J&J Snack Foods' pricing power is likely to be strong as well.
Based on its steady sales and profit growth, it's not out of the question to believe J&J Snack Foods' profits could double every 10 years, or less. This would suggest J&J Snack Foods' dividend, which pays $1.56 (1.4% yield) annually, could also double over the next decade.
Finally, I'd suggest income investors with a taste for a little adventure consider Skyworks Solutions (NASDAQ: SWKS), a radiofrequency (RF) chipmaker in the technology sector.
Your biggest concern as a shareholder of Skyworks is pretty much Apple (NASDAQ:AAPL). Apple has a small army of parts and components suppliers for its iPhone, but Skyworks is among the premier names found in Apple's flagship device. Recently, Apple's iPhone sales disappointed Wall Street, leaving some analysts and investors to wonder if Apple is losing its innovative touch. More importantly, a slowdown in Apple iPhone sales means an almost certain slowdown in RF chip demand for Skyworks.
That's the big issue for Skyworks recently; now let's examine why it's mostly white noise.
For starters, even with a "slowdown" in Apple iPhone sales, we're likely looking at the tech giant logging 200 million-plus smartphone sales annually. I'd hardly call that shabby. Skyworks also has ins with a number of other manufacturers beyond Apple, including Samsung with the Galaxy S6 and S7, as well as overseas manufacturers who are still running on 2G, 3G, and 4G networks. Skyworks has the diverse product line to meet the higher-margin needs of Apple and Samsung, while also supplementing its top and bottom lines in emerging markets.
Another thing you have to appreciate as an investor is that Skyworks is doing this pretty much all organically. Skyworks isn't out buying innovation -- it's reinvesting from within. Doing so has helped it forge a tight relationship with its customers, such as Apple, and it should help reaccelerate growth when 5G networks emerge in the coming years.
Skyworks is currently paying out just $1.04 annually (1.5% yield), but it happens to be sporting a $1.2 billion cash balance without any debt. Tack on a projected $6.64 in EPS by fiscal 2017, and you can see why I believe Skyworks' dividend is ripe for a pretty substantial increase in the coming years.
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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