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3 Attractive Income Stocks Whose Dividends Could Double

By Sean Williams - May 12, 2016 at 9:22AM

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Want bigger dividend payouts? These three stocks may soon oblige.

Dividend stocks can be the foundation of a great retirement portfolio. Not only do the 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 compounding gains over time.

However, not all income stocks live up to their full potential. Using the payout ratio -- i.e., the percentage of profits a company returns to its shareholders as dividends -- 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.

Capital One Financial
We'll begin the week by taking a closer look at a credit giant in the financial sector, Capital One Financial (COF 2.52%).

Perhaps the biggest selling point of Capital One is its ties to the credit industry. As one of the largest credit card issuers in the United States, it is often benefiting from an expanding U.S. economy. Although that also means it suffers when the economy is contracting, the U.S. economy spends far more time growing than it does shrinking, which works in Capital One's favor over the long run.

Image source: Capital One. 

Cost controls and credit quality have also been boosting Capital One's results. During the first quarter, it reported a 7% decline in non-interest expenses to $3.2 billion, primarily led by a 24% dip in marketing costs. Because it has such a solid percentage of credit card share in the U.S., as well as an easily recognizable brand, Capital One has levers it can pull from time to time to boost profitability and margins via cost-cutting. Additionally, its total nonperforming assets of 0.83% in Q1 2016 implies that credit delinquencies are still historically well below average.

Inorganic growth is another aspect that should allow Capital One's business to flourish. In December 2015, it completed the purchase of GE Capital's Healthcare Financial Services niche lending business for about $9 billion. This financial arm specializes in mortgages and loans to healthcare companies, including nursing homes. With America's population aging, Capital One could become a major player in the healthcare loan arena.

Currently paying out $1.60 annually, which is good enough for a 2.3% yield, Capital One appears as if it's on track to double its dividend over the next five to seven years.

Canadian National Railway
Next up, I'd suggest income investors looking for a solid dividend consider choo-choo-choosing Canadian National Railway (CNI 0.64%) to dig into.

The past two weeks have been a bit rough on shares of our railroad neighbors to the north, following the company's announcement that it was lowering its full-year forecast. Management blamed weaker carload demand precipitated by a drop in petroleum, coal, and grain and fertilizer transports, and also pointed the finger at adverse currency fluctuations since the Canadian dollar has been strengthening relative to the U.S. dollar. Having previously forecast mid-single-digit EPS growth for the year, CN guided Wall Street to expect its 2016 full-year EPS to be in line with that of fiscal 2015.

Image source: Canadian National Railway.

Some investors have taken this weakness as a sign to run for the hills. I view it as an opportunity for long-term-oriented income investors.

The first aspect you'll like about Canadian National is that, like Capital One, it has a lot of levers with which to reduce costs. In addition to benefiting from a substantial drop in average fuel price during Q1 2016, lower labor and fringe benefit costs per gross ton mile helped reduce expenses. Also, its railcars spent less downtime in terminals during Q1, while its operating railcars transported more in revenue per carload, further emphasizing CN's focus on maximizing efficiency.

Canadian National Railway's exposure to the United States is also expected to provide a long-term boost to its business. According to our sister site up north, Motley Fool Canada, which has done some deep digging into CN, forestry products account for about an eighth of the company's revenue, and steady growth in the U.S. housing market is expected to fuel modest demand in this segment. Likewise, intermodal growth to the U.S. and Mexico is another long-term driver. Intermodal typically involves the transportation of consumer goods, meaning as long as the overall economies of the U.S. and Mexico are growing, CN's intermodal business is like to grow as well.

Currently, Canadian National is paying out $1.18 per year, a 2% yield. Considering that full-year EPS could hit $4 by as soon as 2018, and that CN maintains tight cost controls, I'd suggest its dividend could possibly double within the next decade.

Jabil Circuit
Finally, dividend-seeking investors would be wise to take note of contract manufacturer Jabil Circuit (JBL -0.23%) in the technology sector, despite its short-term woes.

To be blunt, Jabil short-circuited in mid-March after it reported its second-quarter earnings results and significantly lowered its full-year forecast. The company's Q2 sales of $4.4 billion and adjusted EPS of $0.57 actually compared well with what the company had previously forecast, and with what Wall Street was expecting. Unfortunately, Jabil lowered its full-year revenue forecast to $18.5 billion, a $1.5 billion drop from its prior guidance, and it slashed its full-year EPS forecast to "approximately $2.12." This was about a $0.50 per share cut from its prior expectations. The culprit? Weaker-than expected iPhone sales. Apple contracts out the manufacture of its iPhone cases to Jabil, and, If you recall, iPhone sales fell year-over-year for the first time ever this past quarter.

Image source: Flickr user Karlis Dambrans.

The good news is that the recent dip in Jabil's stock presents a great opportunity for investors looking for share price appreciation, as well as for income seekers. First of all, remember that we're talking about a manufacturer that has a favorable relationship with Apple, the most valuable brand in the world according to Interbrand. Apple customers tend to be incredibly loyal, and profits from iPhone case orders aren't going to simply vanish for any extended period of time. With iPhone 7 buzz already starting, I'd anticipate Jabil's mobile-based woes being temporary.

Another key growth component in Jabil's arsenal is that 3D printing firms contracts out the  construction of 3D printers to it. In April, MakerBot announced a partnership with Jabil that'll see it manufacturing all MakerBot 3D printers going forward. Although 3D printing has been a boom-bust industry during the past half-decade, compound annual growth could see the industry expand by around 20% through 2020. These figures bode well for Jabil's long-term growth prospects.

Trading at just seven times forward earnings, but with a slowing growth rate, the easiest way for Jabil to appease investors could be a healthy dividend hike. Currently paying out $0.32 annually (a 1.9% yield), it would appear to have plenty of cash flow with which to consider doubling its dividend within the next five to 10 years.

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Stocks Mentioned

Capital One Financial Corporation Stock Quote
Capital One Financial Corporation
$106.82 (2.52%) $2.63
Jabil Circuit, Inc. Stock Quote
Jabil Circuit, Inc.
$51.09 (-0.23%) $0.12
Canadian National Railway Company Stock Quote
Canadian National Railway Company
$113.19 (0.64%) $0.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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