BALTIMORE (Stockpickr) -- The stock market has done an about-face in the last couple of months, shifting from a sideways slump to a rally that's currently on track for double-digit gains by the end of the year. Since the start of January, the S&P 500, for instance, has rallied 5.89%. If the big index can keep it up, that's good for a 12.52% gain by the end of December.
But capital gains are only part of the equation. If you're ignoring dividend payouts, you're doing yourself a huge disservice. In the last year, dividend payouts in among S&P 500 stocks have risen by 15.6%. That means that companies in the big index currently pay out more cash on a nominal basis than ever before.
Factoring in dividends to this year's return numbers, the S&P's gains sit at 6.96% so far, a 20% boost vs. the plain price gains alone. So, yes, dividends clearly matter for your total returns this year. But to find the biggest gains, it's not enough to simply buy names with big payouts today. You have 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.
The term "dividend stock" doesn't typically come to mind when most people think about software giant Microsoft (MSFT), but with a 2.7% dividend yield today, the Windows developer is in the top tier of large-cap dividend payers. And Microsoft's dividend check looks likely to increase in 2014. Right now, the firm pays out a 28-cent quarterly dividend, but after four straight quarters of flat payouts, Microsoft looks likely to deploy more cash for dividends this fall.
Microsoft doesn't need much of an introduction. The firm is one of the largest software makers in the world, thanks to the dominance of its Windows operating system and Office suite of productivity applications. It's also a major consumer electronics name today, thanks to the acquisition of Nokia's (NOK) handset business, an active tablet unit and a thriving gaming console franchise in the Xbox. But while the consumer devices may get a disproportionate share of ad spending, make no mistake -- Windows, Office and enterprise solutions are Microsoft's real cash cows.
From a financial standpoint, Microsoft is in stellar shape. The firm currently carries $80 billion in net cash and investments, enough to cover approximately 23% of the firm's current market capitalization. Ex-cash, Microsoft's P/E ratio drops to a thrifty 11.9. This tech titan isn't dirt cheap, but it's pretty close.
Retail giant Wal-Mart (WMT) has been a pretty poor performer in 2014. Since the calendar flipped to January, shares of Wal-Mart are down close to 5%, dragged lower by the occasional fundamental misstep. But that stalled share price doesn't reflect the progress WMT has made at its growth strategy this year. As Wal-Mart moves forward with its multi-format store plan, the firm should be able to capture enough sales growth to move the needle; for a firm with Wal-Mart's scale, that's a big deal.
Wal-Mart is the undisputed king of retail. The firm boasts approximately 11,000 stores worldwide, primarily its namesake supercenters and Sam's Club wholesale clubs. Not only does the firm tip the scales with $476 billion in annual sales, it also manages to move those mountains of merchandise at net profit margins that consistently approach 3.5%. That's a big profit margin for a retail business, and combined with WMT's scale, it means that this firm throws off substantial cash for internal growth and investor consumption.
For years, the international segment has been Wal-Mart's weak spot. Despite the fact that Wal-Mart isn't exactly a newcomer to most of the markets that it operates in, overseas performance numbers still fall much lower than the returns WMT earns on its U.S. stores. Right now, Wal-Mart's 48-cent quarterly dividend payout adds up to a 2.6% yield.
Philip Morris International
Philip Morris International (PM) is your prototypical "sin stock." The tobacco giant operates in a recession-resistant business with sticky customers and deep net profit margins (above 28% last year). It's also a major income play, thanks to a 4.35% dividend payout at currently price levels. As I write, PM pays out a 94-cent quarterly dividend check to investors, but after four straight quarters of a flat rate, I'd expect this name to break the $1 barrier on its payout in 2014.
Philip Morris International is the second-largest tobacco firm in the world, with approximately 28% of the ex-U.S. global market. The firm's brands include flagship Marlboro as well as second-tier names such as L&M, Parliament and Chesterfield. Philip Morris International stepped out on its own after a 2008 spin-off from Altria (MO) separated the firm's domestic and international tobacco businesses. There's no question that PM is the more attractive of the two businesses, thanks to attractive emerging market demographics and lower regulations than found here at home.
Looking at the financials, one of the biggest challenges for this stock in recent years has been the fact that, since sales are made in foreign currencies and then converted into dollars, PM's overseas earnings take a conversion hit when the dollar is strong. But even those headwinds haven't been enough to derail PM's growth trajectory. And with PM's dividend averaging 13% growth over the last three years, investors should get ready for another hike.
Nothing goes together quite like dividends and utility stocks. So while I'm the first to admit that adding Duke Energy (DUK) to our list of potential dividend hikers is a bit of a layup, it doesn't change the fact that income investors should be paying attention to this name. Duke Energy is the largest utility in the U.S. -- the firm owns regulated businesses that deliver electricity and gas to approximately 7.1 million customers in the Carolinas, Indiana, Ohio, Kentucky and Florida.
And right now, the firm's 78-cent dividend payout adds up to a 4.3% yield.
Like a handful of its peers, Duke has been selling off some of its non-regulated assets (like 7.5 gigawatts of generation capacity at its Midwestern power plants), forgoing exposure to energy commodities in favor of the steady, predictable regulated earnings. Duke's exposure to states with accommodative regulators is a big part of why it's been so eager to shed those assets. As of this writing, around 90% of Duke Energy's earnings come from regulated distribution.
Duke's dividend payouts have remained consistent, and should continue to grow, especially as DUK finds cost savings from its $29 billion acquisition of Progress Energy two years ago. The firm announces earnings on Aug. 4, which could be a dividend boost date.
As the largest candy maker in the U.S., Hershey (HSY) commands a whopping 43% share of the domestic chocolate business. That positioning translates into some pretty sweet profits for the $21 billion food maker: Last year, HSY 11 cents out of every sales dollar into net income, $3.61 per share in total. Of that, it's paid out $1.94 per share directly to shareholders in the form of dividends over the last 12 months, adding up to a 2% yield today.
But Hershey looks primed to boost that payout amount in 2014.
Hershey's brands include names like Reese's, Kit Kat and Twizzlers in addition to its popular namesake products. In total, the firm boasts more than 80 brands sold in 70 countries. But that vast majority of sales are still generated here at home; only 15% of revenue is generated overseas. If Hershey can boost its exposure to foreign candy sales, it has the potential to log some material growth in the years ahead.
In the past several years, dividends have failed to keep pace with a double-digit sales and profit growth rate. That leaves some cushion for HSY to hike its payout without getting overextended. For now, HSY pays just under half of its quarterly net income in the form of dividends.
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.