BALTIMORE (Stockpickr) -- Yesterday's surprise event-driven selloff in stocks was an important reminder not to rely exclusively on capital gains in 2014, especially with stocks sitting on the high end of their historic price range. Put simply, with chances of a meaningful correction on the horizon, dividends still matter for your portfolio this summer.
The good news is that now's a better time than ever to be a dividend investor.
As I write, U.S. corporations are paying out record dividends thanks to a record pile of cash on corporate balance sheets -- and the dividend yield of the S&P 500 is hovering in a range higher than we've seen in any sustained period since the mid-1990s. Adjusting for the incredibly low yields on treasuries, dividend payouts are massive right now.
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.
Up first is Verizon Communications (VZ), a $208 billion telecom giant with an equally giant dividend payout. That dividend has added some material performance numbers to VZ's total returns in 2014; without them, this stock is only up 2.4% since the calendar flipped to January. For income-seekers, Verizon's 4.2% yield is one of the biggest on the S&P 500 -- and it looks like it's about to get boosted in the next quarter.
Verizon Communications the largest local phone and wireless company in the U.S., edging just ahead of top rival AT&T (T) in both categories. Verizon's wired network reaches 25% of the population, and Verizon Wireless boasts 103 million retail subscribers. Scale comes with some serious advantages in the wireless business, and Verizon's bigger-than-thou size means that it can spread network costs across more customers and upsell a larger rolodex of subscribers to margin-boosting services like "triple-play" packages.
Quite frankly, Verizon overpaid to buy the 45% of Verizon Wireless it didn't own from Vodafone (VOD) last year. But the market has already voted that it's happy to take the balance sheet leverage in exchange for full ownership of the nation's largest mobile carrier. It's important to note that the firm's unloading of non-core assets in the last several years unburdened the balance sheet enough to make the big price tag affordable -- and it leaves room for a dividend hike in the next quarter.
Right now, VZ pays a 53-cent quarterly check, but next week's earnings could come with a raise for investors.
Investment bank Goldman Sachs (GS) is another large-cap name that looks ready to give shareholders a raise. Goldman doesn't need much of an introduction. For better or worse, the firm is basically the face of Wall Street. And that reputation gives the firm serious profit power in 2014.
Goldman is one of the biggest diversified financial firms in the world. Best known for its investment bank, the firm also operates institutional client services (such as prime brokerage and custody), investment management and retail services. Goldman's reputation alone holds a lot of cachet with many clients, particularly in the investment management side of the business, where wealthy retail clients want the Goldman Sachs name on their statements. In spite of lower deal premiums, increasing M&A and IPO volume in 2014 should help to propel Goldman's investment banking revenue this year.
The decision to convert into a bank holding company during the financial crisis is an important change for income investors: It means that the Fed gets veto approval over proposed dividend hikes for Goldman. It also means that the firm can't expose itself to the same levels of risk that it was permitted to in the past. Ultimately, the increased scrutiny is a good thing, even if it comes at the cost of short-term returns.
Right now, GS pays out a 55-cent quarterly dividend, but a hike looks likely to get rubber stamped by the Fed in the next quarter.
2014 is driving some solid performance in shares of snack foods company Mondelez International (MDLZ). Since the start of the year, this food stock has climbed 7.6% higher thanks to better-than-expected sales growth numbers. Right now, the firm's 14-cent dividend payout adds up to a 1.47% yield, but the check that Mondelez cuts to investors is likely to get a boost in the next quarter.
The Mondelez name started appearing in your local grocery store back in 2012. That's when Kraft Foods Group's (KRFT) former parent spun off the snack and grocery divisions, renaming the former Mondelez. The new firm owns brands such as Oreo, Cadbury, Trident and Ritz. That break-apart decision makes sense for shareholders: Snacks typically carry higher margins, and that will mean higher corporate profits without the dilutive effects of the grocery arm.
Mondelez benefits from mature product lines here at home with relatively high consumer stickiness, but more than 80% of the firm’s sales come from outside of North America. Much of that remaining exposure comes from emerging market economies, exactly the mix that investors should be targeting from this stock. While MDLZ took on considerable debt ($18.9 billion today) when it got spun off, but the firm's $2.4 billion cash position helps reduce any risk of liquidity issues.
This stock's short track record has included a big focus on returning value to shareholders. I'm expecting that to continue with a dividend hike next quarter.
Altera (ALTR) weighs in as the No. 2 player in the programmable logic device market, a subset of chips that can have their circuitry reprogrammed by the manufacturer's clients. PLDs have been growing in demand as the engineering flexibility they give device manufacturers outweighs their cost. Altera's customers include original equipment manufacturers of everything from communications devices to automobile components.
Altera's PLDs open the doors to lower-production product runs, making them perfect for the industrial, communications, and automotive sectors. Since manufacturers don't need to develop application-specific integrated circuits, which have large fixed-costs and cannot be reconfigured. A production deal with Intel (INTC) gives Altera access to the most advanced manufacturing facilities in the world, enabling the firm to compete with cutting edge purpose-built chips.
From a financial standpoint, Altera is in stellar shape. The firm carries $3.26 billion in net cash and investments on its balance sheet, enough to cover more than 30% of ALTR's total market capitalization today. That's a huge amount of risk reduction, and investors should expect management to deploy some of that dry powder to hike its 1.74% dividend yield.
Right now, Altera pays out a 15-cent quarterly check to investors, but next week's earnings release could come with a raise.
Calling Republic Services (RSG) a huge garbage stock isn't a detractor -- it's a compliment. That's because the $13 billion name is the second-largest provider of waste management services in the U.S. Republic operates more than 338 individual trash collection companies, with nearly 200 transfer stations, 70 recycling centers and 190 landfills in its network.
Republic's business is largely recession-resistant. Because individuals and companies need to dispose of trash regardless of economic conditions, customer stickiness is high during all phases of the economic cycle. Likewise, because of RSG's large scale, it's able to vie for large national accounts that regional players can't bid for. While competition is tough with larger peer Waste Management (WM), the market is big enough for both firms to see growth in the next few years.
While the waste disposal business is capital intense (a single new garbage truck can cost more than $250,000 for example), the firm’s operations throw off plenty of cash to cover interest payments and dividend hikes. Look for a boost to RSG's 26-cent dividend payout in the next quarter. Right now, Republic's dividend adds up to a 2.82% yield.
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.