BALTIMORE (Stockpickr) -- Want to outperform the broad market this year? Then it makes sense to focus on the biggest, most boring dividend payers on the market.
Dividend payers have been vastly outperforming nonpayers so far this year, and it's all thanks to a flight to yield that kicked on in earnest when the calendar flipped to March. That's not really a new phenomenon. Over the last three and a half decades, dividends stocks have outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, according to data compiled by Ned Davis Research.
But to find the biggest gains, it's not enough to simply buy names with big payouts today. You've got to think about what they'll be paying 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.
Without further ado, here's a look at five stocks that could be about to increase their dividend payments in the next quarter.
For investors in search of hefty dividend payouts, it's hard to beat Altria Group (MO). Altria is the name behind Marlboro, the number-one tobacco brand in the U.S., as well as a collection of other tobacco businesses ranging from cigars to e-cigarettes to smokeless tobacco. Altria also owns Ste. Michelle Wine Estates and a huge 27.1% stake in brewing giant SABMiller (SBMRY).
That adds up to enough cash generation to support a whopping 4.8% dividend yield today. But Altria's payout looks primed for a hike in the near-term. Here's why.
Don't confuse a growing dividend story with a growth story overall. Altria's business is shrinking, not growing. U.S. tobacco is dying a slow death as smoking rates among consumers here at home slowly decrease. International growth prospects are out the window since MO spun off its international business as Philip Morris International (PM) in 2008. But the key word is that demand is dying slowly; cigarette volumes should only see slips in the mid-single digits for the next few years. In the meantime, Altria will continue to pay out massive free cash flows and massive dividends.
There are a few glimmers of growth hopes in Altria's product portfolio. It's recent launch of the MarkTen e-cigarette brand stands to open MO to a corner of the tobacco market that's been gaining in popularity. Likewise, exposure to alcoholic beverages reduces the firm's reliance on the domestic cigarette market.
Altria has the wherewithal to hike its dividend right now, and after four straight quarters of paying a 48-cent check to investors, it's time to look out for a payout hike.
Home improvement retailer Lowe's (LOW) doesn't sport the kind of high-yield dividend payout that Altria does. At 1.58%, Lowe's dividend is a mere third of the payout at Altria. But LOW looks likely to hike its quarterly payout in the near-term; for now, the firm pays an 18-cent dividend each quarter.
Lowe's operates more than 1,800 big box stores across North America. And in 2014, LOW is benefitting from big tailwinds in the housing market that it's so sensitive too. As home prices build and homeowners' equity grows, willingness to shell out big bucks for home improvements grows in kind. Because LOW courts commercial contractors as well as do-it-yourselfers, the firm is able to supply far more projects than those lacking a contractor business. Likewise, LOW's installation sales add a high-margin boost to the firm's revenues.
Even though LOW's dividend payout isn't earth-shattering, the firm has historically been a huge payer of shareholder yield: that is, dividends, debt reduction, and share buybacks have added up to a 6.4% yield over the last year. Not only does that return considerable cash to investors, but it also means that LOW has plenty of dry powder to allocate to the dividend side of that equation if management so chooses.
After a full year of paying its 18-cent dividend, look for a near-term hike to happen.
Yum! Brands (YUM) has a reputation for overseas growth. The firm sports more than 40,000 fast food restaurants spread across more than 125 countries, making it the largest restaurant network on earth. Yum!'s most popular brands include KFC, Pizza Hut and Taco Bell. At last count, Yum! Brands currently pays out a 37-cent dividend check each quarter, adding up to a 1.98% dividend yield at current share prices.
Yum was one of the most aggressive U.S. food franchisors entering the Chinese market, and its been one of the biggest beneficiaries in the consumption growth among the new Chinese middle class. By staying sensitive to local tastes (rather than simply opening Taco Bell stores in Beijing), the firm has been able to deliver average unit sales that far exceed the competition. Localized fast food concepts Little Sheep and East Dawning are a big part of that. And despite some recent softness in the Chinese market, the country remains a huge growth opportunity in the longer-term.
Because of its huge scale, YUM enjoys some big distribution and supply chain benefits. Those advantages have helped the firm retain deep net margins despite a breakneck growth rate. The franchise model is another big factor in YUM's growth. By reducing capital requirements for growth by putting that risk on franchisors, YUM should be able to keep up its growth rates without resorting to excessive leverage.
Another potential dividend hiker with a big China story is Caterpillar (CAT), the $63 billion heavy equipment maker. CAT is the largest manufacturer of construction and mining equipment in the world, with more than 200 dealers worldwide. The firm's yellow bulldozers, excavators, and loaders are unmistakable -- and its brand is robust enough that the firm has been able to license it for everything from toys to apparel to cellular phones.
Competition is fierce in the heavy equipment business, particularly in markets such as China, where infrastructure growth is huge and rival equipment makers are chasing the opportunity aggressively. Despite the black cloud of competition over CAT right now, the firm has still managed to dramatically increase its unit sales in the last several years and collect deep net margins for its trouble. A stellar reputation combined with a large service arm have been critical factors in that growth.
Another secret to Caterpillar's success is a well-capitalized captive finance arm that's able to extend credit to customers at historically low interest rates. With an exceedingly low cost of capital today, central bankers are subsidizing equipment purchases in this environment, and smart builders are taking advantage of that purchasing power. CAT's scale gives it a lending ability that few rivals can claim. And with those tailwinds in place, CAT looks ready for a hike to its 60-cent quarterly dividend.
At present, that dividend payout adds up to a 2.36% yield. Look for a boost in 2014.
Last up today is Kellogg (K), a name that's been the prototypical high-performing dividend stock in 2014. Since the calendar flipped to January, Kellogg has rallied 11%, besting the S&P's 1.3% return by a big margin. And after four straight quarters paying a 46-cent dividend check, Kellogg looks ready for a boost to its 2.71% yield.
Kellogg owns a portfolio of popular food brands, ranging from Special K to Corn Flakes to Pop-Tarts, and now Pringles. The firm's dominance in consumer pantries gives Kellogg a relatively strong moat for a food product maker, and the firm has been able to use a combination of new products domestically and new markets internationally to achieve solid growth rates for the past several years. Today, overseas sales only contribute one-third of overall revenues, a fact that leaves a lot of opportunity on the table for the firm in the years ahead.
Betting on a dividend hike in Kellogg is a bit of a lay-up. The firm has only skipped a dividend hike in four of the last 50 years, and it's paid out a dividend without fail since 1925. In 2014, Kellogg's payout ratio leaves enough room in the books for another dividend hike this year. That, in turn, should keep Kellogg's momentum running this year.
To see these dividend plays in action, check out the at Dividend Stocks for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.