Imagine if your paycheck doubled. Probably few of us have ever suddenly experienced this with our jobs, but it's something dividend investors can enjoy. If that intrigues you, read on to see why Wingstop (NASDAQ: WING), SS&C Technologies (NASDAQ: SSNC), and Domino's Pizza (NYSE: DPZ) are three top dividend stocks that can double their payouts.
However, a word at the outset: These are all low-yield dividend stocks. A dividend yield is how much a dividend pays annually relative to your investment. Let's say you invest $100 and get four quarterly dividend payments of $0.25. The dividend yield in this scenario is 1%. Generally speaking, anything less than 2% is considered low yield.
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I believe low-yield dividend stocks are a good place to search for overlooked opportunities. Not only can some low-yield dividend stocks offer superior dividend growth compared with their high-yield counterparts, some of these companies are growing their businesses enough to produce market-beating stock returns too -- the dividend is just the cherry on top.
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Wingstop never skipped a beat during the COVID-19 pandemic -- same-store sales were up 9.9% and 31.9% in the first two quarters of this year. But this sales growth wasn't a fluke. The company is on pace for its 17th consecutive year of comps growth.
In Wingstop's investor day presentation, management said that even its oldest locations are still growing sales. And management believes it hasn't found a limit for the sales its restaurant are capable of generating. That's good news with the company rapidly expanding. Even in this turbulent year, it expects to open between 120 and 130 net new locations in 2020. As this growth continues, Wingstop's business is poised to thrive.
SS&C Technologies is a software company that helps its customers perform important tasks like taxes, accounting, and asset management. It's well received as evidenced by its more than 18,000 clients and retention rates over 90%. But the company is still struggling with new sales right now. Potential customers are cautiously evaluating the coronavirus' strain on the economy.
Management is operating under the assumption things won't recover until 2021. Even so, adjusted revenue (which excludes an acquisition and a change in accounting rules) for the second quarter of 2020 was only down 1%. Furthermore, the company is guiding for earnings per share of $4.10 for 2020, an increase of 7% from 2019.
This means SS&C is set to increase earnings despite the trying times, so growth can be even better during good times. For now, management feels comfortable enough to start buying back stock with its $750 million buyback program. This can increase earnings per share even further. And trading at around 16 times this year's anticipated earnings, shares are cheaper than a lot of other technology stocks right now.
Like Wingstop, Domino's has generated strong sales during the pandemic due to its robust delivery operations: Revenue is up 12% through the first three fiscal quarters of 2020. Consider that according to NPD Group data in Domino's investor presentation, the company had 36% of the pizza delivery market in 2019. That's huge market share. For comparison, independent and regional pizza chains controlled 38% of the market.
But independent and regional restaurants are among the most vulnerable amid the coronavirus pandemic. Not all can survive, let alone thrive as Domino's has. I'm betting that the company can hold on to market-share gains from 2020 and even take more of the pie from less-fortunate players in the pizza space.
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How the dividends can double
To gauge the likelihood of a company raising its dividend, we can look at the payout ratio, which compares earnings per share with dividends per share. It's possible for companies to pay more in dividends than they actually earn, but generally speaking, a low payout ratio is ideal for determining dividend-growth potential.
Here are the current dividend growth rates of these three companies and their payout ratios:
- Wingstop's payout ratio is 46%. Since it began paying its quarterly dividend in 2017, it has raised the payout at least 20% each year. Most recently, the company boosted its dividend from $0.11 per share to $0.14 per share -- an increase of 27%. At this pace, its dividend would double in the next three years.
- SS&C Technologies' payout ratio is 25%. Since 2016, the company has raised its quarterly dividend by 12% or more every year. In August, it increased its payout again by 12% to $0.14 per share. At this pace, its dividend would double in the next six years.
- Domino's payout ratio is 24%. The company's dividend raises have wildly fluctuated in size, but annual raises have happened since 2013. Its last two raises were by 18% and 20%, putting it on a four-year pace to double from here.
Of course, these three companies could slow the rate of their dividend raises -- I'm not making a rigid prediction. The point is that Wingstop, SS&C Technologies, and Domino's all have track records of growing their quarterly payout. Combined with their broader growth opportunities and low payout ratios, I believe these three companies are strong candidates to double their dividends over the next several years.
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