As Fed Chair Janet Yellen and company mull over the possibility of a rate hike next month, a huge chunk of U.S. stocks are pondering rate hikes of their own -- dividend rate hikes, that is.
Dividend payouts from the companies in the S&P 500 are up more than 10% in the last 12 months, hovering at record highs as firms try to figure out what to do with their record $1.4 trillion in cash and near-cash investments. So far, the consensus has been to pay more back to their shareholders. And over time, those dividend boosts add up to more than you may realize -- even for stocks you don't typically consider to be "dividend stocks."
According to research from Morgan Stanley, dividends have contributed more than 41% of the stock market's total returns over the last eight decades.
To find the biggest benefit from dividends, though, it's not enough to simply buy names with big payouts today. You've got to think about which names are going to be paying more tomorrow too.
So instead of chasing yield, we'll try to step in front of the next round of stock payout hikes.
For our purposes, that "crystal ball" is composed of a few factors: namely a solid balance sheet, low payout ratio, and a history of dividend hikes. While those items don't guarantee dividend announcements in the next month or three, they do dramatically increase the odds that management will hike their cash payouts to shareholders. And they've helped us grab onto dividend hikes with a high success rate in the past.
Without further ado, here's a look at five big stocks that could be about to increase their dividend payments in the next quarter. Think of it as your dividend preview.
Up first is home improvement retailer Home Depot (HD) - Get Report . Dividends have mostly been an afterthought in shares of Home Depot this year. With shares up more than 27% since the calendar flipped to January, the firm's 1.8% dividend yield has been a relatively small component of total returns in 2015. But dividends and capital gains are two sides of the same coin -- and investors can expect to see that coin getting bigger in the coming quarter thanks to a dividend boost.
Home Depot is the biggest home improvement retailer in the world, with 2,269 big-box store locations spread across the U.S., Canada and Mexico. Besides the firm's core retail customer base, Home Depot has a thriving wholesale construction supply business, a fact that's given the firm pretty direct exposure to positive tailwinds in the North American housing market over the last several years. Increased focus on boosting margins through private labels, innovative product launches and more service revenues should help Home Depot solidify its upside, even if momentum wanes in housing prices.
Home Depot has a long track record of returning considerable value to shareholders in the form of dividends and share buybacks. In fact, the firm has returned approximately a fifth of its market capitalization to investors in the last five years alone, contributing to the share price rally that this stock has experienced.
Currently, Home Depot pays a 59-cent quarterly dividend. Look for management to announce a hike to payouts in early 2016.
$57 billion automobile manufacturer Ford Motor (F) - Get Report has seen a less one-sided year from a price performance standpoint. Shares have shed about 6% of their market value since January, a loss that gets pared down to a much less bitter 2.2% once dividends are factored in. Right now, Ford's 15-cent quarterly payout adds up to a hefty 4% yield.
That's the highest Ford's dividend has been in nearly a decade… Ford is one of the biggest car manufacturers in the world, building cars under the Ford and Lincoln brands. The U.S. and Europe, where Ford owns 15% and 8% of the market for cars, respectively, add up to more than four-fifths of this carmaker's sales. Like its Detroit peers, Ford has undergone some momentous changes in the last eight years or so, fixing its financials, improving its product quality, and paring down its collection of brands.
Financially speaking, Ford is in good shape, with an investment-grade credit rating, and ample liquidity on its balance sheet. The firm's deal with the UAW union on Friday is a big black cloud that's been lifted from Ford, and the concessions that management made were more or less in line with expectations. Ford has been good at returning value to investors -- look for the company to announce a dividend hike first thing in 2016.
As shoppers gear up for Black Friday sales, department store retailer Nordstrom (JWN) - Get Report is gearing up for a boost to its 2.5% dividend yield. Nordstrom operates approximately 300 stores under the Nordstrom and Nordstrom Rack banners and also owns the HauteLook and Trunk Club brands online. The firm's higher-end focus makes it a valuable brand with a deeper moat than its more value-centric department store competitors.
Nordstrom's service-centric brand gives it customer stickiness, and it also keeps the firm aligned with the luxury end of the apparel market, which hasn't suffered from the same economic hiccups that retailers targeting the middle and lower ends of the income spectrum have been struggling to combat. While the firm's store count is lower than more mainstream rivals, it's also not as scalable as a concept. The introduction of innovative online shopping brands should help to offset the brick-and-mortar growth challenges at Nordstrom.
The Nordstrom Rack chain, which sells off-priced brand-label merchandise, is a major boon for the greater Nordstrom enterprise. That's because, while competitors end up selling excess inventory at fire sale prices to other off-price stores, Nordstrom is able to keep those sales in-house, recouping a bigger chunk of revenues while still not competing with the firm's full-price stores.
Right now, Nordstrom pays a 37-cent quarterly dividend, but if history is any indication, investors are likely to get paid a bigger dividend starting in the first quarter of the new year.
Staying with the retail theme for a moment brings us to consumer electronics seller Best Buy (BBY) - Get Report . Best Buy has had a tough year in 2015, shedding about 19% of its market value since the calendar flipped to January. But the bear case for this $11 billion retailer might just be overdone -- and a dividend hike in the quarter ahead could be management's way of signaling that.
Best Buy may be getting beat by larger online retailers, but the firm's 1,731 brick-and-mortar store locations still manage to collect about 15% of the U.S. consumer electronics market. For a while now, Wall Street has viewed Best Buy's physical stores as a liability, when in fact they're the firm's biggest asset -- even if it's been a misallocated one. The introduction of major ship-from-store capabilities is a great example of leveraging that asset to compete with online rivals. New investments in improving the in-store sales experience should help the firm convert that geographic footprint into a benefit for in-person shoppers.
Another big move in the right direction is the firm's cost reduction strategy. So far, Best Buy has shed more than a billion dollars worth of annual costs from its income statement -- and the firm believes that it has significantly further to go. The unceremonious selloff in shares has left investors with a retailer that trades for just 13 times profits right now. Pull out Best Buy's $1.7 billion in net cash, and that P/E ratio slims down to just 10.79. That's a bargain valuation in a market where such things have been hard to come by.
Right now, Best Buy pays a 23-cent quarterly dividend that adds up to a 2.9% yield. Look for a boost in the first quarter.
Last up is $7.3 billion electronic device maker Garmin (GRMN) - Get Report . Garmin is a unique story, not least of all because it's a moving target -- ironic for a company that makes GPS locators. While the firm's in-car GPS business has largely become commoditized, as many short sellers had anticipated early, Garmin has morphed into a company that leverages that location tech expertise for a myriad of niche electronic devices. And that's enabling Garmin to generate considerable cash to share with investors.
Garmin makes devices for the fitness, outdoor, aviation and marine markets. Those corners of the electronics space come with bigger profits, and Garmin has found huge success spending R&D dollars in its most specialized segments and then trickling its technology down to its lower-margin offerings. A big consumer shift to wearable devices has helped to fuel sales for specialized items such as Garmin's Approach gold watch series, which buyers are willing to spend on even when they might not wear a more general-purpose smart watch.
Financially speaking, Garmin is in excellent shape right now. The firm carries more than $2.4 billion in cash, with zero debt. That's enough cash in the bank to pay for more than a third of Garmin's market capitalization at today's prices, a big risk reducer. Ex-cash, Garmin trades for just 9 times trailing earnings, making it another bargain on our list of dividend-hikers. Right now, the firm pays a hefty 5.3% dividend yield, a payout that's likely to see a hike once the calendar rolls over.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author was long GRMN.