We cover a lot of different topics in my premium income newsletter, High-Yield Investing. One thing I make a point to feature in each issue is a detailed screen of some sort for interesting income opportunities.
Sometimes I run straightforward, simple screens, like last month’s search for low-cost, high-yield equity income funds. Other months we might track down potential short squeeze candidates, talk about ways to combat inflation or hunt for highly efficient businesses that generate the most revenue per employee.
This month, I wanted to get back to basics and pinpoint a few stocks that are poised for meaningful dividend hikes in the near future.
According to FactSet Research, dividend distributions among S&P 500 companies have increased for 11 straight quarters. Over the past year, aggregate payments are up 4.8% to $431 billion. That’s the good news. The bad news is that many companies have reached the upper limits of what they can afford to distribute relative to current profits.
In fact, 44 members of the S&P 500 (almost 10%) have unsustainable payout ratios above 100%, meaning they aren’t earning enough to cover their dividend payments. Many of these companies may have trouble maintaining their current payout — let alone increasing it.
Still, after a mild “earnings recession” in which corporate profits slumped for a few quarters, bottom lines are starting to strengthen again. More than three-fourths (76%) of S&P companies to report first-quarter earnings through April 20 have managed to beat estimates. And the average growth rate of 9.2% is tracking to be the highest since 2011.
That has helped fuel a number of recent dividend hikes, some of which have directly benefitted the portfolio holdings in my newsletter.
What companies might be next? Well, to answer that question I screened for companies with a strong dividend track record (rising payments for at least the past three consecutive years), a positive 2017 earnings outlook, and ample room for further increases (modest payout ratios below 60%).
This test proved tougher than expected. Most companies prefer to make their annual increase in the first quarter and won’t have another raise until next year. The intent here is to pinpoint potential dividend hikes over the next few months — so that eliminates many contenders.
The biggest hurdle that tripped up the remaining candidates was an excessive payout ratio. I can’t count the number of quality companies that met all other requirements, only to be eliminated once I found out they were paying out more than 90% of their profits — or 100% in the case of pharma giant Merck & Co., Inc. (NYSE:MRK) and a few dozen others.
Here are some of the more notable survivors.
These are all good potential candidates you might want to consider. But keep in mind, this is just a screen. You should evaluate them in more detail on your own and simply consider this a starting point for further research to see if they might be a good fit.
But we can certainly look to some of these dividend stocks for more detail now…