Personal Finance

3 Great Income Stocks That Could Double Their Dividends

GILD Chart

Most income investors search for stocks based on yield alone, which can be a huge mistake. I'd argue that it is a far better strategy to look for dividend stocks that have strong earnings power and low payout ratios. Companies with those traits have the ability to meaningfully raise their dividend over time; that provides investors with a good shot at earning capital appreciation in addition to income.

Knowing that, here's a look at three dividend-paying stocks -- Gilead Sciences (NASDAQ: GILD) , Synchrony Financial (NYSE: SYF) , and General Motors (NYSE: GM) -- that are highly profitable and sport payout ratios below 20%. That implies that their dividends could rise substantially in the years ahead.

GILD Chart

GILD data by YCharts .

Better still, this healthy dividend only consumes 17% of Gilead's earnings, implying that the company could more than double its dividend in the years ahead without breaking a sweat.

Of course, it is also possible that Gilead could be a value trap at these levels, since revenue and earnings have been heading in reverse . If that trend continues indefinitely, then the slide will likely continue from here.

Thankfully, Gilead's lucrative HIV portfolio is still growing quickly, and the company also boasts more than 30 potential drugs in its pipeline. That offers investors hope that the company will eventually be able to return the top line to growth mode again.

How Synchrony Financial's modest dividend could grow

You may not be familiar with the name "Synchrony Financial," but the odds are decent that you might actually be one of the company's customers and not even know it.

In a former life, Synchrony was the consumer and business credit services arm of General Electric , but the company was spun out of its former parents in 2014. This company runs a private-label credit card network for the likes of , Wal-Mart , and dozens of other major retailers . Last year the company served more than 68 million customer accounts and financed $114 billion in total sales.

GM Chart

GM data by YCharts .

While General Motors' stock has been stuck in the mud, management is doing its best to pass on its financial success to shareholders. The company has been plowing billions into buybacks and dividends, which has pushed its dividend yield up to a tempting 4%. Better yet, that huge yield only consumes 17% of the company's annual earnings, which implies that there is huge room for more increases from here.

While the possibility of peak auto sales is a concern, GM could make up for any losses by pushing to become a big player in the fast-growing Chinese market. The company is also tackling Tesla Motors head-on with its innovative Chevy Bolt concept. These moves haven't impressed Wall Street thus far, but income investors could be greatly rewarded by buying shares of GM today.

10 stocks we like better than Gilead Sciences

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Gilead Sciences wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of Nov. 7, 2016

Brian Feroldi owns shares of, and The Motley Fool owns shares of and recommends, Gilead Sciences, and Tesla Motors. The Motley Fool owns shares of General Electric. The Motley Fool recommends General Motors and Synchrony Financial.

Like this article? Follow Brian on Twitter, where he goes by the handle @Longtermmindset , or connect with him on LinkedIn to see more articles like this.

Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics


Latest Personal Finance Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More