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, but 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 read on whether or not a company has room to increase its dividend. Payout ratios between 50% and 75% are ideal. Here are three income stocks with payout ratios currently below 50% that could potentially double dividend payments.
Supermarkets are about as far from exciting as it gets when we're talking about business models, but sometimes the most boring business models are the most consistently profitable. That's why grocery giant Kroger (NYSE:KR) tops this week's list of attractive income stocks that could double.
Kroger may not be able to offer the same level of innovation as high-growth industries, but it's making a lot of the right moves to improve its long-term margins and keep its customers happy. For example, Kroger has been tinkering with digital shelf tags in its stores, which consumers have thus far been receptive to. Additionally, self-checkout kiosks are freeing up store associates to help customers on a one-on-one basis, which is more likely to result in an emotional attachment to a Kroger location. Kroger has also used its customer purchasing data to make targeted product offerings to customer who may not have tried products previously.
Kroger has also pushed heavily into organic foods in an effort to attract millennials and make them long-term customers. According to the Organic Trade Association, organic food sales hit a new record of $43.3 billion in 2015, growing 11% from the prior-year period. Comparatively, traditional supermarket sales grew by just 3%, so you can understand why Kroger is amped about this opportunity. Specifically, Kroger has been focused on introducing its own private organic brands, which have worked to keep costs down for consumers, possibly pulling them away from traditional organic players like Whole Foods Market.
Location, convenience, and aesthetics help, too. Most Kroger locations are chosen with precision since they're within two miles of local communities, and a number of Kroger locations include fuel stations as well. Kroger made a major push to add fuel stations to emulate Costco's success. By providing more of a one-stop shopping experience, Kroger is angling to keep customers in its stores longer -- and if they stay longer, they're more liable to make discretionary purchases. Kroger's efforts to remodel a number of its stores have helped keep customers coming back as well.
Currently paying out $0.48 annually (1.6% yield), but on track to generate $2.73 in full-year EPS by 2020 per Wall Street's consensus, a doubling in its payout seems plausible over the next decade.
Skyworks Solutions Inc.
Next up, we'll take a closer look at why analog and mixed-signal semiconductor manufacturer Skyworks Solutions (NASDAQ:SWKS) could be an income stock you'll want on your radar.
The obvious allure (and risk) of a company like Skyworks is its intimate ties with Apple, the maker of the iPhone. Based on a recent teardown of the recently released iPhone 7 by Chipworks, Skyworks wound up securing various diversity receive modules, securing at least one it took away from Murata, as well as a GSM chip. Skyworks and Apple have a long relationship, and that's likely to continue, to the benefit of Skyworks. As long as Apple continues to make around 200 million iPhone sales annually, Skyworks should be able to count on some degree of guaranteed cash flow.
However, Skyworks is more than just the company that rides Apple's coattails. It's an under-the-radar Internet of Things (IoT) company that could make waves in the coming years. Most notably, Skyworks announced a $2 billion cash purchase of PMC-Sierra last year, which should help diversify its product line and give the company a push into the IoT. Specifically PMC-Sierra's lead products should give Skyworks an even larger presence in mobile and big data. Cisco Systems predicts the IoT could cumulatively generate $14.4 trillion in sales by 2022, and Skyworks will be in great shape to take advantage of this growth.
Another reason to like Skyworks, and its potential for future dividend increases, is the company's balance sheet and willingness to improve shareholder yield. With no debt and $974 million in cash as of the end of the second quarter, Skyworks has a lot of financial flexibility -- so much so that it recently announced a new $400 million share repurchase program and upped its payout to $1.12 annually (a 1.5% yield). With more than $6 in full-year EPS forecast by Wall Street in 2017, it's possible Skyworks' payout could double within the next 5 to 10 years.
Worthington Industries, Inc.
Lastly, income investors looking for a "steel" of a deal would be wise to give value-added steel processing company Worthington Industries (NYSE:WOR) a closer look.
Arguably the biggest growth driver for Worthington Industries of late has been its M&A strategy. Between 2009 and mid-2015, Worthington acquired 18 companies, which have helped diversify its product offerings and expand its customer base. M&A is a smart move in the current low-yield environment, as it allows Worthington access to cheap capital at pretty much historically low lending rates. As long as rates remain low, Worthington should be able to make earnings accretive acquisitions on a regular basis.
Low interest rates are a boon for the auto industry, and construction markets as well. Access to cheap capital has allowed the consumer to go shopping, and for builders to take on projects, which has improved demand for Worthington's steel processing segment. In particular, auto demand continues to surprise to the upside, with China still in its infancy in terms of auto market growth.
More recently, Worthington has benefited from stronger steel prices, which should allow it to pass along higher prices to its customers and boost its margins. Steel prices have been in a fairly constant uptrend since December, potentially signaling a bottoming in pessimism and an uptick in demand for the industry as a whole.
Even following Worthington's recently increased dividend to $0.20 per quarter in June (1.7% yield), the company looks poised to pass along further payout hikes with more than $3 in full-year EPS projected in fiscal 2017 and beyond.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. The Motley Fool owns shares of and recommends Apple, Costco Wholesale, Skyworks Solutions, and Whole Foods Market. It also recommends Cisco Systems and has the following options: long January 2018 $90 calls on Apple, short January 2018 $95 calls on Apple, and short January 2017 $75 calls on Skyworks Solutions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.