Dividends come in all shapes and sizes. Some companies either don't pay their investors a penny or just pay a token dividend, choosing instead to reinvest all their cash flow to grow. Meanwhile, others don't have very many reinvestment options for their cash flow, so they return the bulk of it to investors. However, the sweet spot for income investors consists of those companies that still have plenty of money left over after funding growth, because it means they should provide them with a steadily growing income stream.
Three companies that fit that latter group are Procter & Gamble (NYSE: PG) , Cummins (NYSE: CMI) , and Phillips 66 (NYSE: PSX) . Not only do they have a history of growing their dividend, but each also has solid growth prospects on the near horizon. That's why our contributors think these companies could boost their payout again this year.
A big jump for one of the market's oldest dividends
Demitri Kalogeropoulos (Procter & Gamble): It won't come as a surprise to anyone on Wall Street when Procter & Gamble raises its dividend in April. After all, the consumer-goods giant has boosted its payout for 60 straight years in one of the longest such streaks on the stock market. Investors might just be shocked by the size of the increase, though.
P&G's dividend growth pace has collapsed recently , as sales and profit gains turned into losses. After a 7% raise in 2014, the company gave investors a 3% boost in 2015, followed by a meager 1% uptick last year.
I'm expecting a much bigger increase in 2017.
For one thing, operating results are improving. P&G just raised its sales growth outlook after robust organic volume growth surprised the management team. Second, the company is flush with cash from brand divestments and cost cuts. Most of those excess funds are heading back to shareholders in the form of stock repurchases, but there's room in the $22 billion capital return plan this year for heftier dividend payments, too. And third, P&G recently attracted an activist investor who is likely agitating for more shareholder-friendly moves , like an aggressive dividend increase.
P&G's stock currently yields just below 3%, which puts it right on par with large industry rivals. A surprisingly strong dividend boost this year is affordable, though, and it would likely give income investors another good reason to look at a business that appears headed for faster growth and increased profitability following almost three years of disappointing results.
Daniel Miller(Cummins Inc.): One company that's likely to announce a dividend raise over the next few months is Cummins, a global leader that designs, manufactures, distributes, and services diesel and natural gas engines and related technology. The company's dividend has consistently increased with its free cash flow over the past decade:
Despite consistent increases, the company's yield is a modest 2.6% and it pays out only about 50% of its free cash flow and slightly less than 50% of its earnings. Although its long-term outlook is still sound, the company does face some near-term headwinds,as its top line fell 5% during the recent fourth quarter, thanks to pressure from a decline in commercial truck production in North America.
On the flip side, the company's bottom line and free cash flow should remain strong, protecting the dividend, simply because so many competitors have dropped out of its markets in the past few years. One example is Caterpillar 's exit from the North America heavy-duty engine market in 2010, as it chose to focus on heavy-duty trucks outside the region with its Navistar alliance.
Part of the driving force behind competitors' exits was the increasingly stringent EPA emissions standards, which increased the cost for research and development of the engines. Not everybody was willing to play ball, but Cummins was, and it took market share.
In broader terms, Cummins should have top- and bottom-line upside as the largest manufacturer of natural gas and hybrid bus engines as America turns to alternative-powered vehicles. With the company's history of consistent dividend increases, a competitive advantage with its scale and engine-developing knowledge, and a payout ratio of less than 50%, don't be surprised when Cummins raises its dividend yet again later in 2017.
Almost a sure thing
Matt DiLallo (Phillips 66): Refiner Phillips 66 is coming off a tough year. Earnings across all four of its business segments were down, including an 89% plunge in refining profits. However, the company still generated $3 billion in cash flow last year and completed $1.3 billion in asset dropdowns to its MLP. The company used that cash flow, plus cash on hand, to finance nearly $2.4 billion of capital projects and return $2.3 billion in cash to investors, which included increasing the dividend 12.5%.
While the refining market remains tough in 2017, the company's growth in spending in other areas should start paying dividends this year. That's because Phillips 66 is nearing the completion of several major projects, which should result in a decline in capital spending and an increase in cash flow as these assets enter service. CEO Greg Garland told investors on the company's fourth-quarter conference call that they can expect the dividend to rise in 2017 and the stock-buyback program to continue.
Given the company's history, that dividend increase could come this May, which would continue its streak of annual increases. In fact, since gaining its independence five years ago, the company has already raised the payout six times. Furthermore, with so many large growth projects starting up, and the fact that it has $2.7 billion of cash on the balance sheet, it wouldn't be a surprise to see the company give investors another double-digit raise this year.
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Daniel Miller has no position in any stocks mentioned. Demitrios Kalogeropoulos has no position in any stocks mentioned. Matt DiLallo owns shares of Phillips 66. The Motley Fool owns shares of and recommends Cummins. The Motley Fool has a disclosure policy .