When looking at dividend-paying companies, I see several thematic tailwinds that should continue to blow rather hard through 2021.
Companies whose businesses are properly positioned to capitalize on these tailwinds should see a pronounced impact on revenue, profits and cash flow. Those companies with a track record of boosting dividends may even raise them further.
Here I'll identify three key tailwinds for the year and then zero in on those dividend payers poised to upsize their 2021 dividends payments to shareholders.
We are in the very early innings for the buildout of not only 5G networks, but also WiFi 6, which will bring faster data speeds, improve network capacity and foster a fresh round of hardware upgrades. They will also usher in a new set of applications that will accelerate data consumption and foster it, as well.
This multiyear deployment will drive demand for a variety of processing and connectivity chips and that means we will likely see further dividend increases from Broadcom (AVGO) - Get Broadcom Inc. Report and Qualcomm (QCOM) - Get QUALCOMM Incorporated Report.
Both companies fit with my “buy the bullets, not the guns" investing strategy, as they supply virtually all the key hardware players that will benefit from the 5G and WiFi 6 upgrade cycle. They’ve also been increasing their dividends for more than nine years each.
With dividend payout ratios hovering near 60% for AVGO shares and below 40% for QCOM shares, both companies could easily up their dividends as their revenue and earnings climb in 2021.
Plant-Based Proteins Yield Opportunity
The global plant-based protein market size is projected to grow to $14.5 billion by 2025 from $10.3 billion in 2020, according to data published by Research and Markets. We’ve seen a number of restaurant companies from Jack in the Box (JACK) - Get Jack in the Box Inc. Report and Papa John's (PZZA) - Get Papa John's International, Inc. Report introduce plant-based alternatives on their menus and in 2021 McDonald’s (MCD) - Get McDonald's Corporation (MCD) Report is slated to join their ranks with the “McPlant” Burger.
Most would quickly think of Beyond Meat (BYND) - Get Beyond Meat, Inc. Report as a way to play this shift in consumer preference, but for us dividend-seeking investors the shares simply don’t cut the mustard. The reason is the company isn’t, at least yet, a dividend payer.
Here’s the thing, to drive consumer adoption for those and other plant-based protein products, they will need to taste and smell delicious. That’s where International Flavors & Fragrances (IFF) - Get International Flavors & Fragrances Inc. (IFF) Report, a company that has grown its dividend consecutively over the last 18 years, enters the picture.
As its name suggests, International Flavors & Fragrances brings a portfolio of taste, scent and complementary adjacent products that supply some 38,000 customers in approximately 200 countries. Roughly two-thirds of the company’s products are derived from its taste portfolio, while the balance is from the scent. That portfolio is also poised to benefit from the shift in consumer preference to natural ingredients, including flavor and fragrance, as well as rising disposable income in the emerging markets. Even after increasing its dividend for nearly 20 years, the company’s dividend payout ratio is roughly 55%, which implies there is ample room for further increases. Keep in mind, the consensus is for earnings per share of $6.16 for IFF in 2021, up from $5.59 in 2020.
Another dividend company that will also see some lift from the shift in consumer preferences to better-for-you ingredients is McCormick & Co. (MKC) - Get McCormick & Company, Incorporated (MKC) Report. Just before the Thanksgiving holiday, the company announced its 35th consecutive increase in its quarterly dividend.
If I had to choose between McCormick and IFF from a dividend-perspective, I would see odds of a greater dividend increase from IFF. I say this given that McCormick’s dividend payout ratio is just over 95%.
Digital Shopping Surges
With the rise in Covid-19 cases and restrictions returning, we are seeing a pronounced shift to digital shopping. Nowhere was this shift more evident than the Black Friday and Cyber Monday 2020 shopping bonanza, when bricks-and-mortar traffic was a mere 5.1% of what it was in 2019, according to Sensormatic Solutions. Traffic at stores on Black Friday fell by 52.1%. By comparison, Black Friday 2020 was the second-largest online spending day in history in the U.S., and Cyber Monday was another record-breaker with $10.8 billion spent online.
As we look into 2021, more shoppers becoming used to not only the convenience of digital shopping but the ability to stretch their spending dollars will likely drive more shopping dollars to that modality.
The knee-jerk reaction by most investors when they think of digital shopping is for Amazon (AMZN) - Get Amazon.com, Inc. Report, but the company is not a dividend payer. Over the last several years, Walmart (WMT) - Get Walmart Inc. Report has made a number of investments to compete with Amazon, with one of the biggest recently launched Walmart+, which is designed to compete with Amazon Prime. Recently, Walmart announced that members of Walmart+ will no longer have to spend $35 for next-day or two-day shipping.
I think both Amazon and Walmart will be the long-term winners, taking shares from other retailers, but with Walmart having increased its dividend for 47 consecutive years and a dividend payout ratio below 40% there’s little question which one dividend seeking investors should consider for 2021.
Chris Versace is a regular contributor to Real Money Pro, TheStreet’s sister site for active stock traders. Click here to learn more and get great columns, commentary and trade ideas from Tim Collins, Mark Sebastian, Paul Price, Doug Kass, and others.
At the time of publication, Versace had no positions in any securities mentioned.