This week marks a year since the big S&P 500 index reached its all-time intraday high of 2,134.72 -- and the intervening 12 months haven't exactly been a good time to be a stock market investor. Since the market peaked last May, the S&P has lost just shy of 4% of its market value, grinding sideways in a wide range.
That's the bad news. The good news is that factoring dividends into the equation changes the picture quite a bit. For instance, the S&P 500 Total Return Index, which includes the impact of reinvested dividends on the S&P's price, actually set a new record price just a month ago. Simply put, companies are making up for the lack of price performance in this stock market environment by chipping in to investors' portfolios with dividend payouts.
Over time, those dividend contributions can add up to be the dominant factor in your portfolio's performance. Just over the last 10 years, dividends have accounted for almost half of the S&P 500's performance, handing investors the difference between 57.5% gains and 95.9% gains when reinvested dividends are factored in. But to find the biggest benefit from dividends, 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, a 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 coming months. Think of it as your dividend preview.
Bank of America
Leading things off is financial services giant Bank of America (BAC) - Get Report . Bank of America has been seeing headlines this week, after an appeals court threw out the $1.27 billion penalty dealt to Bank of America because of mortgages sold by its Countrywide unit leading up to the financial crisis. If nothing else, the ruling serves as a reminder that BofA has finally managed to shake off most of the mortgage-related risks that it took on around 2008.
And now Bank of America looks well-positioned to post a dividend hike in the quarter ahead.
Bank of America is one of the biggest financial institutions on the planet, with more than $2 trillion in total assets. The firm serves more than 47 million consumer and small business relationships through 4,700 bank branches and 16,000 ATMs. The prospect of rising interest rates has been exciting investors lately, as Bank of America stands to benefit from widening net interest margins by harnessing its huge base of low-cost deposits for what could become much higher-return loans.
The Fed also has another impact on BofA's upside potential right now. That's because company management doesn't have final say on their own dividend payouts -- the Fed does. Like other systemically important financial firms, Bank of America needs the Fed's blessing before returning more capital to shareholders. But with an improved business, and after a long stretch without a raise, regulators are likely to approve letting the dividend get bigger in 2016.
Right now, Bank of America pays a 5-cent quarterly dividend check, a payout that's remained unchanged since August 2014. Investors are likely to see a raise in the months ahead.
Nike (NKE) - Get Report has spent the first few months of 2016 in correction mode, shedding nearly 10% of its market value since the calendar flipped to January. But that pullback in Nike's share price has been piquing investors' interest as shares come down to what Wall Street sees as a more reasonable valuation level.
Nike could get even more attractive with a dividend hike on the way. Currently, Nike pays a 16-cent quarterly dividend that adds up to a 1.13% yield at current price levels, and it looks likely to give investors a raise later this year.
Nike is the biggest name in the lucrative athletic apparel business. The firm boasts a sales channel that reaches more than 50,000 retail account and 850 company-owned stores. North America still represents the bulk of Nike's exposure, making up 45% of total sales last year. Emerging markets (including China, which Nike breaks out separately) accounted for only 23% of overall sales, leaving the firm with a big long-term opportunity as growing middle class populations in emerging countries acquire more status symbols like name-brand clothing.
Financially, Nike is in good shape. The firm currently carries more than $3 billion in net cash on its balance sheet, enough to handle any unexpected economic hiccups along the way. Nike's dividend payout ratio has been trending lower in recent years, as the firm has shifted from giving back as much as 40% of its profits to shareholders to just 28% as of the most recent quarter. That excess earnings power clears the way for a dividend hike in 2016.
Analog chipmaker Skyworks Solutions (SWKS) - Get Report is another stock that kicked off the year correcting. Skyworks is down 13% so far in 2016, but that top-line stat misses a much more important number for investors right now: the nearly 20% rebound shares have managed to pull off since this stock bottomed back in mid-February. Skyworks has been growing its dividend payout significantly in the last couple of years, up from 11 cents per quarter in 2014 to 26 cents for the last four straight quarters. Now the firm looks likely to give investors a raise as we head into the summer months.
Skyworks Solutions makes analog chips used in everything from cell phones to avionics to defibrillators. The firm's biggest customers are in the mobile device market, an application that's particularly attractive thanks to mobile device growth and extremely short replacement cycles. Because cellular connectivity is the most critical component of any smartphone, SWKS' offerings in its core handset business are mission critical for its customers. That's helped the firm capture major supplier relationships with many of the major phone makers.
Skyworks is another stock that looks very financially stable right now. The firm currently carries almost $1.2 billion in cash on its balance sheet, and zero debt, which is enough to pay for nearly 10% of the firm's outstanding shares at current price levels today. That hefty cash coverage also helps to keep Skyworks' dividend growth secure right now. Shares are beginning to look like a bargain opportunity after investors unloaded this stock in 2015 on concerns over its leverage to the phone handset business. A dividend hike gives management the opportunity to signal to investors that this stock is fundamentally strong in 2016.
Despite an outstanding economic environment for the airline business, American Airlines (AAL) - Get Report shareholders haven't been sharing in the record profits that this $18 billion air carrier has been pulling in after coming out of bankruptcy just a few years ago. Plummeting jet fuel prices (plus a lack of fuel hedges) and increasing demand for air travel have given American Airlines a major tailwind -- one that's not likely to reverse even as oil prices begin to recover this quarter.
American Airlines is one of the big U.S. legacy carriers, with more than 6,700 flights daily to 350 worldwide destinations. Besides its core mainline business, American also owns three of its regional feeder airlines, Envoy, PSA, and Piedmont. The firm's fleet of 941 mainline aircraft is the biggest in the world, and it's been undergoing a major renewal, with hundreds of new aircraft on order. Those new planes serve as an oil price insurance policy of sorts, as they include many much more fuel efficient models that will materially reduce jet fuel costs at the same time American appeals to more passengers with newer planes.
The merger with US Airways that was completed in 2013 has been undergoing a long-term integration process, the fruits of which will really begin to become apparent in 2016. Management has been slow to return capital to shareholders post-bankruptcy, holding the firm's 10-cent quarterly dividend check constant since it was announced back in the summer of 2014. But with the firm's profits ballooning, a dividend raise finally looks prudent for American this year.
Illinois Tools Works
Last up on our list of potential dividend hikers is $37 billion manufacturing conglomerate Illinois Tool Works (ITW) - Get Report . ITW is enjoying a standout year so far in 2016. Since the start of this year, this stock has managed to shove its way 13% higher, leaving the S&P's sideways grind in its dust. And management seems likely to add onto that total return outperformance later this summer with a dividend boost.
Illinois Tool Works owns a long list of industrial and consumer manufacturing brands, including household names like Sub-Zero and Wolf appliances, Rain-X and Zip-Pak. Just a few years ago, ITW had approximately 800 individual divisions; now it's down to 90. That shedding of its least attractive and most commodity-like businesses has resulted in bigger margins and more consistent financial performance at ITW without resorting to sacrificing the lion's share of its revenues.
While one of ITW's core principles is the fact that it lets managers of its individual subsidiaries have a high degree of autonomy, costs are constantly under a microscope at this firm. Recently, that's resulted in the firm consolidating some functions, minimizing duplication of roles like HR and accounting, and gaining leverage in sourcing raw materials across business units. The end result is more cash to share with shareholders.
For the past four quarters, ITW has paid out a 55-cent quarterly dividend that adds up to a 2.1% yield at current price levels. And if history is any indication, investors will see a raise to that quarterly dividend check later this summer.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.