Dividend growth is one of the most powerful but often-overlooked elements of a great portfolio. Sure, having stocks that go up is important, and having income from investments with decent dividend yields is also key … but if you can buy a stock that steadily grows its dividend over time, your returns snowball in a hurry.
Consider McDonald’s (MCD), which paid just 21.5 cents in annual dividends in 2000 … but after steady increases, including a boost just a few weeks ago, MCD now pays 81 cents per quarter!
Furthermore, back in 2000, McDonald’s stock yielded about 0.7% per share, but if you bought back then, your personal dividend yield on a cost basis of around $30 would be almost 11% annually.
Of course, the big run-up in McDonald’s dividends has already happened, so dramatic dividend growth might be hard to come by in MCD going forward. In fact, some shareholders were upset in September when the recent dividend hike was just 5% above previous payouts.
But there are stocks out there that could be on the cusp of big dividend growth over the next decade based on huge increases to payouts recently — it’s just that you don’t hear about them because they aren’t household names.
Those picks are Amgen (AMGN), Corning (GLW), US Bancorp (USB), Coach (COH) and Cummins (CMI).
Amgen (AMGN) is a biotechnology stock that focuses on niche treatments for cancer, kidney and bone disease. The company only started paying a dividend in 2011, but has quickly increased its payouts from 28 cents a quarter to 47 cents currently — 67% in two years.
Also worth noting is that Amgen’s fiscal 2013 earnings are on pace for $7.30 per share — meaning that the $1.88 in annual dividends is a mere 26% of profits, and that the dividend can move much higher even if profits do not.
But profits are moving higher, pacing $7.75 in EPS for fiscal 2014 according to Standard & Poor’s. That means dividends have even more upside in the years ahead to build off of these recent increases.
Corning (GLW) is an industrial glass company that has been riding the recent wave of smartphone and tablet manufacturing. Its Gorilla Glass has been a mainstay of devices including the Apple (AAPL) iPhone, though that growth has been in counterpoint to other challenges in the glass biz, including soft demand for flatscreen displays in both the TV and desktop computer market.
But while GLW stock has seen its ups and downs, the dividend has been decidedly up in the past few years. After initiating a dividend at 5 cents a share right before the financial crisis, Corning had simply been trying to keep its head above water since the Great Recession … but in 2011 raised the dividend to 7.5 cents per quarter, then 9 cents in 2012 and 10 cents per quarter most recently.
That payout still is just 32% of FY2013 earnings, and earnings are expected to grow again in 2014 — so the dividend growth should continue at Corning, too, based on recent increases to the payout.
US Bancorp (USB) is an interesting in-between financial stock. It’s a regional bank that’s large enough to be a heavyweight with $63 billion in market capitalization, but focused enough to still see opportunities for growth, either via expansion geographically or through acquisitions.
The company also has been growing its dividend mightily in the wake of the financial crisis. After slashing its dividend from 42.5 cents quarterly to just a nickel, regulators have been quick to allow USB dividend increases to make up some of the lost ground. With an increase this year to 23 cents a share, the dividend remains below pre-crisis levels but up almost five-fold from 2009 while some major banks like Citigroup (C) and Bank of America (BAC) have slashed payouts to a mere penny per quarter with no sign of increases anytime soon.
US Bancorp yields 2.5%. Beyond the dividend, shares of USB are also around all-time highs — so this stock has bounced back from the financial meltdown of 2008.
Handbag icon Coach (COH) probably isn’t seen by many as a stable dividend player, with this midcap stock heavily dependent on discretionary spending and a share price that’s up almost 300% from the financial crisis lows of 2009.
However, the dividend that was initiated in 2009 has been growing fast too, from 8 cents a share when it started to 33.75 cents per quarter right now — quadrupling in just four years, and across a very challenging four years at that.
Earnings are running at $3.80 this fiscal year, meaning that the payout ratio at Coach is a mere 35% to boot. And with a 2.5% dividend already, that’s a very attractive sign to investors.
Diesel engine giant Cummins (CMI) would seemingly be a mixed bag in the wake of the Great Recession. But this stock is actually running hot in part thanks to improving vehicle sales, as well as because of increased political and economic uncertainty that has led to high demand for its power generators.
Cummins only yields about 1.8% in dividends, but its payout just soared from 50 cents quarterly to 62.5 cents per quarter for a 25% dividend hike. Furthermore, this is just more than 30% of the current year’s EPS projection from Standard & Poor’s.
And Cummins didn’t just keep its dividend during the downturn, it increased it — going from 12.5 cents per quarter at the start of 2008 to five times that currently.
That’s an encouraging sign for future dividend growth.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.