BALTIMORE (Stockpickr) -- Don't get fooled by the flash of new all-time highs in the big stock indices; if you're not buying dividend names, you're missing out on a big chunk of total returns in 2014. The Dow Jones Industrial Average is a perfect example right now: Factoring in dividends means 44% higher total returns year-to-date than capital gains alone.
That's right -- dividends have added nearly half again to Wall Street's biggest stock returns this year. And a funny thing has been happening in the last few sessions too. New highs have been propelled by high-yielding blue chips, not momentum stocks.
Turn your focus long-term, and the importance of owning dividend stocks becomes even more jarring. According to research from Wharton Professor Jeremy Siegel, reinvested dividends account for as much as 97% of total long-term market performance. Better yet, dividends even impact how big your capital gains are. Data from Ned Davis Research reveals that, over the last 36 years, dividend stocks have outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, all while paying out cash to their shareholders.
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 coffee giant Starbucks (SBUX) . Starbucks has built a massive business out of convincing consumers that there's value in a $5 cup of coffee. Today, the firm boasts more than 20,900 locations, located all over the world. The firm's growth rate has been so brisk that the idea of a Starbucks on every corner is a punch line. That scale has also helped the firm scale up its dividend payouts: the firm has averaged double-digit growth in its dividend in recent years, and it's on track for another hike in 2014.
Right now, Starbucks pays out a 26-cent quarterly check to shareholders.
On its face, the retail coffee business isn't attractive. Barriers to entry are nil, competition is plentiful, and the product is a discretionary luxury that's the first thing to get cut from consumers' budgets when times get tough. But despite all of the detractors, Starbucks continues to dominate the industry. In fact, one in every three retail coffee cups bear the firm's logo. And even though SBUX's store footprint is utterly massive, there's still room for growth in under-saturated markets, particularly overseas.
Financially speaking, Starbucks is well-positioned. The firm carries approximately $500 million in net cash and investments, a number that's more meaningful when you consider the huge fixed costs that go into building out a 20,000-plus store network. And growth of "side businesses," such as grocery products and home brewing, add a shot in the arm to a very healthy mainline operation.
Look for shareholders to get a dividend hike in the next quarter.
Automatic Data Processing
Despite the Fed's beating on the war drum on Wednesday, the fact remains that jobs numbers are improving -- and that's a very good thing for outsourced HR administrator Automatic Data Processing (ADP) .
ADP has a long history of dividend hikes. In fact, the firm has raised its dividend every year for nearly four decades. Yes, that makes ADP's presence on this list a little bit of a lay-up, but it's still worth paying attention to in the fourth quarter
Automatic Data Processing provides payroll and benefits services to some 600,000 clients. While that business looked rough in the wake of 2008, ADP managed to find new ways to sell to its existing customer Rolodex -- and those new service revenue streams will continue even as employment numbers swell. Like its peers, ADP historically earns interest on the float from payroll cash deposited by clients, and that means that if higher rates are on the horizon, the firm stands to become one of the biggest beneficiaries.
ADP's business is sticky. It's costly and complex to switch HR providers, and as a result, the firm's average client sticks with the firm for more than a decade. As employment regulations continue to become more complex, that average tenure should continue to grow, not decrease. The decision to spin off its dealer services segment into a separate company this month should unlock extra value for investors in the fourth quarter. Right now, ADP pays out a 48-cent quarterly dividend.
2014 has been a good year for Brown-Forman (BF.B) -- shares are up more than 22.7% since the calendar flipped to January. That's performance to drink to. Then again, pretty much any reason is a good reason to drink, as far as this $19.5 billion distiller is concerned. Brown-Forman owns a valuable collection of brands, including flagship Jack Daniel's, Finlandia vodka, Southern Comfort, Korbel and El Jimador.
Recent years have been kind to whiskey makers, and that's a very good thing for Brown-Forman -- Jack Daniel's Tennessee Whiskey makes up around half of the firm's sales volume. The iconic status of the Jack Daniel's label abroad should help drive sales growth in the years ahead. Partnerships with powerful allies give Brown-Forman a formidable distribution network that reaches 135 countries and gets liquor on shelves at a low cost. That's a big part of how BF.B converted 21 cents on every sales dollar into net profits last quarter.
Industry consolidations have been making the booze business interesting in recent years. Ot's not inconceivable that a larger peer would want to snap up Brown-Forman, especially given what's happened at peers like Beam.
Right now, Brown-Forman pays out a 29-cent quarterly dividend that's good for a 1.25% yield. Investors should be on the lookout for a raise in the coming quarter.
American Electric Power
Sliding up the yield scale brings us to American Electric Power (AEP) , a public utility name that pays out a 3.8% annual dividend check to investors at current levels. In a lot of ways, AEP is the quintessential income stock: It pays a fat yield, it operates a staid (even boring) regulated utility business that's hugely predictable, and it has a history of hiking its payout for investors. Right now, that payout has held steady at 50 cents for the last four quarters.
AEP is one of the biggest integrated power companies in the country. That means that it has a hand in every step of the power process from generation to transmission to distribution, with more than 5 million retail power customers at the end of the line. On the other end, AEP owns 80 generating stations that produce nearly 40,000 megawatts of capacity. And while most of that generation capacity (approximately 60%) is costly coal power, the firm has pretty substantial exposure to nuclear and natural gas power, two dirt-cheap plant fuels that AEP is digging into. By being involved in every step of the process, AEP has the ability to squeeze bigger margins out of what’s arguably a pretty boring business.
Like many of its peers, AEP has been working hard to get out of nonregulated businesses. Ultimately, that's a very good thing for investors. It de-risks your dividend, eschewing potential windfalls when times are good in exchange for fixed, predictable rates when times aren't so good. And after a full year of a fixed dividend payout, this stock looks likely to hike its cash check to shareholders in the next quarter.
If electric utilities are perfectly suited to dividend payouts, then midstream energy companies are their identical twin. Enter Oneok (OKE), the general partner of midstream MLP Oneok Partners (OKS) . That status means that this stock has similar exposure to the partnership, but it gets to take advantage of faster dividend growth rates thanks to the way the setup is structured.
In short, OKE is a leveraged bet on natural gas transportation.
With oil prices lingering on the high-end of their historic range, nat gas volumes have been climbing, and that's been boosting profits for ONEOK. Because the firm has minimal exposure to actual commodity risk, it's able to make money when nat gas gets used, regardless of what happens to natural gas prices. Again, that "smoothness" is a big part of what makes it such an attractive name from a dividend standpoint.
Last quarter, ONEOK paid out a 57.5-cent dividend, giving the firm a 3.36% indicated dividend yield. Investors should look for a raise in the quarter ahead. Look for the declaration at the end of October.
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.