Dividend Stocks Could Double from Here
Today we’ll go through potential dividend stocks that could double from now, with more money moving from corporations’ accounts into yours. Specifically, we’ll look at three potential stocks that will double in 2017, based on my personal financial experience from working for large financial institutions, looking after the nest eggs of wealthy individuals. What you learn here could possibly even serve as a template for future investments.
Now, I personally cannot predict the future, nor do I have access to insider information, but history is a great teacher when it comes to making more informed decisions. That’s why you want to look at companies that have increased their dividends by 100% or more in a year. The businesses’ balance sheets and cash flows are also quite important.
There are many different types of dividend stocks, such as high-dividend stocks or stocks that pay out a certain percentage of earnings each quarter. Which type best suits you will depend on your investment goals. That said, I believe that dividend growth stocks are the ideal income stock for anyone, because the investment will grow, which every stockholder should desire.
An Example of a Stock That Doubled Its Payout
In 2015, Bank of America Corp (NYSE:BAC) increased its dividend by 400%, thanks to its cash flow improving and margins expanding. Shareholders were further rewarded the following year with a 50% hike in the per-share payment. The companies listed below are expected to do the same, and without being just a one-year growth story. Seeing dividend growth in the triple-digits in a single year is also possible.
How to Identify Stocks Expected to Double
Here are the factors that you can use to determine whether a stock could double its dividend payment in a year (and if it can even afford to in the first place). These factors could be used for any dividend-paying stock that you think could double its payout.
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1. Low Payout Ratio
The payout ratio is the percentage of earnings paid out via dividends. It is calculated by dividing annual per-share dividends by earnings per share. So, a company earning $2.00 per share each year and paying out $0.50 per share would have a ratio of 25%, since $0.50 is 25% of $2.00. The business keeps the remainder.
There are some companies that have a target payout ratio, so, when earnings grow, so does the dividend. Other businesses will ignore the ratio entirely and pay out the same amount every time. While the ratio is very easy to calculate yourself, it is often provided through financial web sites or your brokerage accounts’ research portal.
When the ratio is below 50%, there is more flexibility regarding payout hikes. A ratio above 50%, on the other hand, means that the company is carrying more debt than it should, which could negatively impact the business. When the ratio is over 100%, it means there is no real chance of seeing a dividend increase, since all earnings are already being put toward the dividend. Lastly, a payout ratio above 100% could mean that the payout will eventually be cut.
2. Cash Position
I would say a healthy company has a less than 10% of its market value in cash. If the cash position is growing year after year, I would encourage doing some research to understand if the company has any plans to use the cash. This can be done by simply listening to a quarterly conference call or by glancing through previous investor presentation materials. If the money is earmarked for a future purpose, there is a lower chance of seeing any hike in the dividend. Just taking a few minutes to understand the company’s goals will help you make a decision, without the false hope of seeing a triple-digit dividend increase.
3. Low Debt Level
This goes hand-in-hand with the cash position of a company. There are such things as good and bad debt; good being if the debt is being used to grow the company faster (to shareholders’ benefit). However, if the company has debt but the company is not growing, that’s a problem—especially because there is still an obligation to repay that debt.
There is no way of knowing if the debt is being used for good or bad until after the fact. However, there is a method of determining if there is more or less debt on the balance sheet: the debt-to-capital (D/C) ratio. This ratio is found by dividing current debt by total capital; a ratio above 50% means there is too much debt, and a ratio below 50% means that the debt is in control. The payout ratio is often already calculated, found on a company’s web site, your brokerage account research area, or on various financial web sites. Therefore, just understanding the ratio is the most important aspect.
The reason why debt is an important area to look at is that, when there is debt on a balance sheet, a company must pay interest and a portion of the outstanding loan as well. Part of the cash flow would be allocated to the debt repayment, which results in less cash for shareholders.
It is okay if a company carries debt; in fact, it is very difficult to find one that doesn’t have any. That said, the debt burden of a company should be decreasing over time, so the best thing to do is look at the total debt held over the past few years.
4. Past Actions
Try to find patterns to determine the future outlook of the dividend. There is no need to look at any financial statements or ratios.
The company’s past actions can help determine how shareholder-friendly it is. For example, the combination of the current and past dividends will make clear if there have been increases, if the payout is regularly reviewed, and whether there’s a chance of one or more future hikes. Other shareholder-friendly moves should be also looked at, such as the history of share repurchase programs.
5. Sector
Lastly, you need to understand what the business does. The things to look out for are how the company performs in a down economy, its cash flow, and how predictable its earnings are. A company that performs well in both a weak and strong economy would be preferred. As for the company’s products and/or services, they should, of course, generate recurring revenue. Further, the predictability of earnings would come from having long-term contracts in place and products and services that remain in demand.
For example, if considering an oil company, look at the price of oil. If it is trading at a lower level compared to the previous year, it is unlikely there is an increased cash flow to turn into a dividend.
If you went through all of the above and one of these criteria were not met, an investment shouldn’t be considered. This way, you can avoid any surprises in your portfolio.
Potential Dividend Stocks to Double in 2017
| Company Name | Stock Symbol | Trading Exchange |
| Apple Inc. | AAPL | NASDAQ |
| AFLAC Incorporated | AFL | NYSE |
| Oracle Corporation | ORCL | NYSE |
1. Apple Inc.
Apple Inc. (NASDAQ:AAPL) had humble beginnings, starting out in a garage in California. But today, Apple is one of the largest companies in the world based on market cap.
A few years ago, AAPL stock would have never made this list. That’s because, at the time, there was no dividend. In 2012, however, a dividend was initiated and, since then, its growth has been impressive.
There are two reasons why APPL stock is able to regularly increase its dividend. First, its low payout ratio has always been under 30%. Increasing the dividend would not harm Apple’s financial position, since there are billions of dollars flowing into the top and bottom lines.
Neos Design/Flickr
Second, there is more than $200.00 billion sitting in cash on the balance sheet, representing about 25% of Apple’s market cap. Just to get an understanding of how large this number is in terms of the dividend, the annual dividend in 2016 totaled approximately $12.1 billion. With this much dough, Apple could easily double its dividend while still retaining a strong cash position. (Source: “Apple Inc.,” MarketWatch, last accessed July 25, 2017.)
2. AFLAC Incorporated
AFLAC Incorporated (NYSE:AFL) is an insurance company that offers health and life insurance to individuals and businesses. The main focus of the business is the U.S., but the firm has operations in Japan as well.
AFLAC has increased its dividend for 34 straight years. With a streak of more than 25 years, and being one of the 500-largest companies on a major American exchange based on market cap, AFL stock has the honor of being part of the S&P 500 Dividend Aristocrat Index.
For 2017, there is a possibility of seeing the dividend double after the annual October review. This can be attributed to the very conservative payout ratio of approximately 27%. In other words, affordability is not a big issue for AFL stock. For proof, look no further than the company’s D/C ratio, sitting at approximately 20%.
The company’s debt levels are very manageable and would not hurt the company; in fact, there is enough cash in AFLAC’s bank account to pay off the entire debt load. So, if a triple-digit dividend increase is announced, it shouldn’t come as a surprise.
3. Oracle Corporation
Oracle Corporation (NYSE:ORCL) is a leading provider of enterprise and technology solutions, selling hardware products and services. The majority of the revenue comes from the software segment, though it has a presence in various areas of the tech market, including cloud computing data storage
Cloud computing is notable for being a high-margin business. And, even though this is a new area of growth for the company, its generates Oracle a steady cash flow. This is in part due to the company’s established relationships with customers and long-term contracts with organizations in the hotel, financials services, and food and beverage industries.
Peter Kaminski/Flickr
The strong cash flow is often used to acquire other businesses in the technology sector. On average, there is a minimum of at least three companies purchased each year that are then integrated into the Oracle ecosystem.
ORCL stock paid its first dividend in 2009, having since hiked it by 100%. With just over $60.0 billion sitting in the company’s bank account (more than 30% of its market cap) further dividend increases are likely. Double the current dividend would move the payout ratio to slightly above 50%, but higher earnings would eventually lower the ratio.