The legendary Wayne Gretzky famously said that “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”
Well, it’s not all that different with dividend stocks. If you’re looking for good long-term returns, you’ll buy a stock sporting an attractive dividend yield. But if you want great returns, you’ll look for stocks raising their dividends year after year.
Over a long time horizon, high-dividend-growth stocks are a lot more likely to keep pace with inflation. Plus, let’s face it — it’s nice getting a raise every year, and that’s exactly what dividend growth stocks do. With every passing year, the amount of cold, hard cash they put in your pocket increases.
But dividends also tell a far more important story. An exceptionally high dividend yield is often a sign of financial distress … and a sign that dividend cuts are a lot more likely than dividend hikes. But dividend growth is a sign of company health. Company boards of directors only vote to raise the payout if they believe a lot more cash will be coming in to replace it.
I don’t have a crystal ball, and I can’t say with 100% certainty which dividend stocks are going to grow their payout the fastest in the years ahead. But by looking at recent dividend growth history gives us a good starting point.
So, today we’re going to take a look at seven stocks that I expect to double their dividends over the next three years. None are what I consider monster dividend yielders today, but all pay a respectable current dividend that promises to get a lot bigger in the years to come.
Dividend Stocks to Buy: Citigroup (C)
Dividend Yield: 1.9%
You’re going to notice a lot of banks on this list, and there’s a good reason for that. After the 2008 meltdown, most banks had to slash or completely eliminate their dividends. And ever since, the Federal Reserve has kept them on a short leash, massively restricting their ability to pay or raise a dividend.
Well, that’s changing. After the most recent stress test by the Fed, most large banks were given the green light to boost their payouts … and they are doing so with gusto.
Take Citigroup Inc (NYSE:C), for example. Citi just doubled its dividend last month and raised its stock buyback plan to boot.
But even after a monster dividend hike like that, Citi’s dividend payout ratio is an extremely modest 24%. Citi could double its dividend again tomorrow, with no change in earnings outlook, and not put itself at risk of financial distress. And that is exactly what I like to see.
Citi’s dividend growth will depend on its profitability over the next three years, which will in turn be affected by interest rates and by the overall health of the economy. Assuming that we avoid a major recession and that the Fed continues to gradually raise rates, the pieces are in place for very respectable profit growth. And given how low the payout ratio is at current levels, I’d be shocked if Citi didn’t double — or triple — its dividend over the next three years.
Dividend Stocks to Buy: Bank of America (BAC)
Dividend Yield: 2.1%
Up next is fellow megabank Bank of America Corp (NYSE:BAC). BAC hiked its dividend by 60% in June after raising it by 50% last year.
Granted, BAC was starting at a very low base. But that’s still impressive dividend growth, no matter how you look at it. And given that Bank of America’s payout ratio is still a very modest 27%, there is still a lot of room for additional growth.
As was the case with Citi, BAC stands to enjoy a serious profit bump if the Fed continues to raise rates. But let’s say that doesn’t happen, or the Fed is a little slower to raise rates than the market is expecting. Even under those conditions, BAC has ample room to raise its dividend without putting itself at risk.
It’s also worth noting that a certain gentleman from Omaha — Mr. Warren Buffett — recently became Bank of America’s largest shareholder. Buffett picked up a ton of warrants when he effectively bailed out BAC back in 2011. Buffett exercised those warrants in August and netted a cool $12 billion in profit. Berkshire Hathaway now owns over 6% of the company’s stock.
Dividend Stocks to Buy: Capital One (COF)
Dividend Yield: 2.1%
I mentioned earlier that most of America’s largest banks passed the Fed’s latest stress test and were thus able to raise their dividends.
Well, credit card giant Capital One Financial Corp. (NYSE:COF) was something of an exception. Capital One got a “conditional pass,” though the Fed indicated that passing at this point is essentially a technicality once they resubmit their plans.
So, we can expect a dividend hike from Capital One in the very near future … and likely many to follow.
Capital One’s dividend has been frozen at current levels for about two years, yet the company has still managed to average 61% annualized dividend growth over the past five years.
I don’t expect that kind of dividend growth going forward, but I do expect it to be robust. Capital One currently pays out a modest 23% of its profits as dividends, so there is plenty of room for growth come what may with earnings.
Capital One will get zinged in the next recession, when delinquencies start to rise again. But that’s likely to be a few years away at the earliest, and in the meantime, we should expect COF’s dividend to double … or come darned close.
Dividend Stocks to Buy: Kinder Morgan (KMI)
Dividend Yield: 2.6%
I’ll now jump to an easy one, midstream pipeline giant Kinder Morgan Inc (NYSE:KMI).
How can I be so certain that Kinder Morgan will raise its payout? Well, to start, management said so. In July, the company announced it would be bumping its dividend by 60% next year and an additional 25% per year for the two following years.
That’s not too shabby if I do say so myself.
Of course, these hikes come after a tough couple of years for KMI shareholders. In late 2015, Kinder Morgan slashed its dividend by 75% due to turbulence in the energy and credit markets. The announced dividend hikes will bring the quarterly payout to 31 cents, which is still below the pre-cut payout of 51 cents. But it’s still a very significant move in the right direction, and very good news for long-suffering KMI shareholders.
At the current stock price (and before the scheduled dividend hikes), KMI yields a respectable 2.6%. That’s not a monster yield by any stretch, but it’s a lot higher than the S&P 500’s current 1.9%.
KMI’s business has some sensitivity to energy prices, but this is far less of a concern now that the company has been deleveraging for nearly two full years. And as a midstream pipeline operator, the vast majority of its cash flows are stable and almost bond-like in their consistency, which is exactly what you want in a long-term dividend payer.
Dividend Stocks to Buy: Energy Transfer Equity (ETE)
Dividend Yield: 6.4%
This next pick is going to be a little more controversial, but I believe that fellow pipeline giant Energy Transfer Equity LP (NYSE:ETE) has a very good chance of doubling its distribution over the next three years. I consider it less of a “sure thing” than Kinder Morgan, and a few pieces have to fall in to place to make it work, but I like our chances.
Kinder Morgan shook up the MLP industry back in 2014 by announcing it would consolidate its empire — which at the time consisted of four publicly traded entities — into a single C-corporation. The move made a complex business a lot simpler and helped to reduce borrowing costs, which also made more funds available to pay out as dividends.
Well, ETE founder Kelcy Warren is contemplating a similar move with the Energy Transfer empire, which currently consists of three public entities, and in a recent call with analysts, Warren suggested that consolidation was “inevitable.”
But even if consolidation — and distribution-boosting cash it would potentially free up — are still a few years away, ETE should get an immediate boost from other developments. The incentive distribution right concessions it gave its sister company Energy Transfer Partners LP (NYSE:ETP) will be rolling off soon, meaning that ETE is about to get a significant boost in cash flow. Furthermore, several large projects — including the controversial Dakota Access Pipeline — have recently come on line or will in the next six months.
I’m not expecting a lot of distribution growth over the next 12 months. But again, if a few things go right for ETE, I believe the company can double its distribution within the next three years, or at least get awfully close.
Dividend Stocks to Buy: CoreSite Realty (COR)
Dividend Yield: 3.1%
We’ve covered banks and energy. Now, let’s take it an entirely different direction with data centers.
Unless you’ve been living under a rock for the past decade, you’ve heard of cloud computing. For both cost and security reasons, corporations and other large institutions have been pushing more and more of their computing and data storage needs to third-party cloud providers. And even companies that prefer to maintain their own hardware are increasingly keeping more of their servers offsite to protect against malicious attacks or natural disasters.
All of this is perfect for datacenter REIT (real estate investment trust) CoreSite Realty Corp (NYSE:COR).
Business has been phenomenally good for CoreSite in recent years, and you can see this in the company’s dividend growth. In the past year, COR stock has raised its dividend twice for a combined 70% bump. And in the past two years, the dividend has more than doubled.
CoreSite currently pays out about 80% of its funds from operations (FFO) as dividends, which is actually a pretty conservative number for a REIT. But it doesn’t give the company a lot of room to boost its dividend without a pretty substantial boost to FFO.
Well, I don’t see that being a problem. CoreSite is growing its FFO at a 24% annual clip. If it keeps that up for another three years, it will double its dividend right on schedule.
Dividend Stocks to Buy: CVS (CVS)
Dividend Yield: 2.5%
I’ll wrap this up with a fairly conservative stock you might not expect to see on a list of dividend stocks set to double their payout in three years: pharmacy chain CVS Health Corp (NYSE:CVS).
For a stodgy pharmacy stock, CVS has been a real dividend-raising dynamo in recent years. Over the past three years, it has raised its dividend just shy of 24% per year, coming within a hair’s breadth of doubling over that period. That’s not too shabby.
CVS’s dividend payout ratio has risen slightly over the past three years, from 28% to 37%. But it’s still low enough to make major dividend hikes doable, so long as profits continue to grow at a healthy clip. Given that free cash flow is growing at 24%, I don’t see that being a problem.
Given the new competition from Amazon.com, Inc. (NASDAQ:AMZN), CVS may opt to be a little more conservative with the dividend growth over the next three years. Only time with tell. But even if CVS ends up falling a little short, you’re still likely to get fantastic dividend growth you’re not likely to get too many other places.
Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management, a registered investment advisor based in Dallas, Texas. As of this writing, he was long KMI, C and ETE.