Year after year,credit card processor
paid out a simple annualdividend of 60 cents a share. Management
thought the payment was a nice gesture to investors, but not
really noteworthy in the context of a triple-digitstock
Yet last year, MasterCard realized that dividend hikes were
the name of the game, and the dividend payout doubled (to $1.20 a
share) in one fell swoop.
Frankly, this company is just getting started. MasterCard
doubled its dividend again this year, to $2.40 a share. It could
double it again in 2014 and 2015 (to $9.60 a share) -- and
itspayout ratio would still be well below 40%.
As I noted in my first look at dividend growers, so many
companies have room to institute major dividend boosts and still
have plenty ofmoney left over to reinvest in growth initiatives.
In fact, you can find them across many industries.
, which paid out a 40-cent-a-share dividend in 2004 and 2005 but
dropped the dividend altogether within a few years. Ford dipped
its toe back in the water again in 2011 with a nickel-a-share
payout, raising that to 20 cents a share last year.
That dividend now stands at 40 cents a share, good for a
3%yield -- and Ford is just getting started. The company's
profits have grown so much that this dividend could well end up
at 60 cents or even 80 cents a share by 2015. That would
translate into a rock-solid 6%dividend yield .
MasterCard and Fordwill have plenty of company as they pursue
robust dividend hikes. With the right screening tools and a set
of basic criteria, you can find the dividend stars of
First, let's look at the universe of dividend-payingstocks in
the S&P 500. More than 70% (359) of companies in theindex pay
a dividend that equates to at least a 1% dividend yield. If we
boost the threshold to a minimum 2% yield, which is right near
the average, 230 companies make the cut.
Now, let's focus on companies with such a yield and a payout
ratio below 40%. We're still talking about 69 companies.
Every one of them could hike their dividends even faster than
their profits are growing, just to get up to the 40% payout ratio
that many companies adhered to between the 1940s and '70s. And as
I noted in part one of this series, today'seconomy -- and
appetite for dividends -- are quite similar to what we saw back
For the sake of conservatism, let's cut the payout ratio below
30%. That leaves ample room for dividend growth. Thirty-seven
companies make the cut.
Of all the companies in the S&P 500 with a dividend yield
of at least 2%, these 10 have the lowest payout ratios.
Source: Thomson Reuters
Flipping this analysis on its head, these are the
highest-yielding stocks in the S&P 500 that have payout
ratios below 30%.
Source: Thomson Reuters
JPMorgan Chase (
and video game retailer
make the grade on both counts.
Surely, companies with solid dividend yields and still-low
payout ratios are worthy of further research -- but that research
might tell you that GameStop faces serious challenges from the
changing gaming environment, as more games are downloaded online
and fewer are bought at stores. So it's wise to focus on
companies that aren't facing obsolescence.
It's also wise to focus on companies that have shown a clear
tendency toward robust dividend hikes. These are the firms most
likely to keep focusing on increasing payouts.
So of the 37 companies in the S&P 500 that have both
payout ratios below 30% and dividend yields above 2%, let's look
at the ones that have boosted their dividends at least 10% in
each of the past two years. (This analysis excludes companies
such as Ford, as the automaker didn't have a dividend in 2010 and
thus doesn't yet have a two-year track record through the end of
The most aggressive dividend boosters have been in the banking
sector, but looks are deceiving. All these banks maintained a
nominal dividend in 2008 and 2009, and the subsequent rebound in
payouts has seemed comparatively enormous -- though these banks
are likely to boost their dividends at a more modest 10% to 20%
pace in the years ahead.
Looking beyond the banks, the tech sector and retailers
dominate the list of solid dividend boosters that sport
attractive yields and still-low payout ratios.
Risks to Consider:
Profit margins have been near record peaks in recent years,
giving companies the confidence to be more generous with dividend
payouts. If margins reverse course -- especially as companies
start to boost employees' pay -- then companies may look to adopt
a more conservative stance on dividend growth.
Action to Take -->
Focusing on dividend payers with low payout ratios can point the
way to steady dividend hikes. The low payout ratios also leave a
nicemargin of error in the event thatcash flow growth slows.
These relatively conservative payout strategies increase the
chance that the dividend will at least be maintained at current
levels, even if the economic climate darkens.
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