BALTIMORE (Stockpickr) -- There's no question about it -- if you own stocks, then dividends are critical for your success as an investor.
Sure, it's been another solid year for stocks, but since the calendar flipped to 2014, dividends have actually contributed nearly a third of the total returns in the big stock indices like the Dow Jones Industrial Average. Translation: even if you don't consider yourself an "income investor," ignore dividends at your own peril.
And that's not likely to change anytime soon.
With record cash on corporate balance sheets, and the Fed exerting downward pressure on interest rates, management teams are getting more bang for their buck by hiking dividend payouts to shareholders. As a result, investors can expect to see the record dividend payouts today keep ratcheting higher in the quarter ahead.
So far, dividend payouts in the S&P 500 are up 14% versus last year.
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 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. 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 stocks that could be about to increase their dividend payments in the next quarter.
Big box store giant Walmart (WMT - Get Report) tips the scales as the largest retailer on the planet -- the firm moved $476 billion in merchandise last year, through its network of 11,000 worldwide stores. Walmart is proof positive that size does indeed matter in the retail business; because of its scale, the firm carries considerable pricing power over suppliers, leverage that keeps WMT's prices lower than the competition.
But while scale offers pricing power, it doesn't always offer margin. That's because Walmart generates nearly half of sales in the grocery segment, a business that comes with low levels of profitability. That grocery exposure does help drive traffic to the more profitable pockets of the store, but ultimately, WMT's strategy is more about lots of low-margin transactions and keeping selling prices lower than at rival stores.
Financially speaking, the biggest detractor for WMT has been growth. Because of its size, it takes a lot to move the needle at this firm, and that's certainly not changing anytime soon. But neither is the fact that Walmart is an immovable object in the top retail spot. WMT currently pays out a 48-cent quarterly dividend that's good for a 2.4% yield. I'd expect to see management announce a dividend hike in early 2015.
United Parcel Service
Package delivery company United Parcel Service (UPS - Get Report) is another name that looks ready to boost its payouts to shareholders -- right now, UPS pays a 67-cent dividend check each quarter, which adds up to a 2.5% yield at current prices. But the firm's signature brown trucks should be carrying fatter checks for investors in the next quarter.
UPS enjoys some massive barriers to entry in the package delivery business -- the costs of replicating its network are one of the biggest factors. With a fleet of 500 aircraft and 100,000 vehicles, creating a network of UPS' scale is no small feat. That's a major part of why the firm shares a duopoly with FedEx (FDX) , and why rivals, like DHL's domestic U.S. service, have failed. UPS currently delivers approximately 17 million packages per day through its global network.
Fuel costs have been a major challenge for UPS in the last few years -- don't forget that the firm is one of the largest airlines in the world by fleet size -- so the recent drop in crude comes with much bigger benefits to UPS' bottom line. Not all of the firm's revenues come from package delivery; more than 15% of sales come from freight forwarding and logistics, a business that's become increasingly popular for UPS' core business customers in recent years. Look for management to announce a dividend hike in early 2015.
Comcast (CMCSA - Get Report) is the biggest cable company in the U.S., with a network that reaches 54 million households. And for most of the last year, investors have been fixated on its plans to get even bigger through the $68 billion acquisition of Time Warner Cable (TWC) . If Comcast's plans make it through the final approvals needed (something that Wall Street expects to see happen by this coming summer), then Comcast's huge scale as a cable company becomes a lot bigger -- and so do its operating advantages.
To combat a stagnant cable business, Comcast has undergone some major transformations in recent years. For instance, it acquired NBCUniversal in a deal finalized last year -- the move gives Comcast access to coveted TV and film content, a commodity that's becoming increasingly important as more consumers leave conventional TV subscriptions in favor of online services.
Meanwhile, Comcast continues to vie for more of its users' communications spending. Like its peers, Comcast obsessed with converting its existing cable customer Rolodex into "triple play" customers who subscribe to TV, internet, and phone services. Selling existing customers on new products is a huge margin driver for Comcast, as customer acquisition costs are much lower. By taking on Time Warner Cable's network too, Comcast gets a much bigger Rolodex to work with.
Right now, CMCSA pays out a 25.5-cent quarterly dividend, or a 1.7% yield. If history is any indication, investors should look for a raise in the quarter ahead.
T. Rowe Price
The multi-year bull market for stocks is a major upside catalyst in shares of $21 billion asset manager T. Rowe Price (TROW - Get Report) . Like other asset management firms, T. Rowe gets paid based on how much money it has under management -- so, with a rising tide lifting all ships, that AUM number is ratcheting higher. T. Rowe had $731 billion in AUM at the end of last quarter…
T. Rowe is one of a small number of independent investment managers that's kept its nose clean over the years. By that, I mean that T. Rowe has eschewed more volatile side-businesses in favor of keeping its core mutual fund and retirement account business secure. As a result, it was one of the better-performing mutual fund managers coming out of 2008, and it's been better able to retain assets. Reputation is paramount at T. Rowe, and the firm prides itself on being a good steward for its clients.
As a result, close to 80% of T. Rowe Price's funds are outperforming the rest of the industry on a 10-year time horizon. That long-term outperformance is an asset that's not easily replicated by rival fund managers. As stock prices keep climbing, AUM should keep rising, and TROW should keep earning bigger profits. Right now, the firm pays out a 44-cent dividend that adds up to a 2.1% yield. The firm's payout ratio is currently the lowest it's been since the 2008 market crash -- look for a dividend boost in the quarter ahead.
I'll admit it -- our last dividend hiker is a bit of a "gimme." That's because, as an electric utility stock, Edison International (EIX - Get Report) and dividends go hand in hand. And after four straight quarters of a 35.5-cent payout, Edison looks very likely to hike its checks to shareholders in the coming quarter -- I'd expect to see an announcement hit during the middle of December.
EIX owns Southern California Edison, the incumbent power utility for 14 million SoCal residents (excluding Los Angeles). Like other regulated utilities, EIX has been shedding exposure to nonregulated businesses in recent years -- frankly, EIX's sale of its wholesale generation unit was a little less planned (it was sold in bankruptcy), but the net result is a firm with far less risk exposure as we head into 2015.
Because Edison operates in a geographically attractive region where electricity demand is high and supply is limited, the firm should be able to generate stable growth by building out its infrastructure. So that's exactly what it's doing -- over the next three years, EIX plans to spend $16 billion on infrastructure investments. Right now, EIX sports one of the lowest payout ratios in the utility sector, and that extra wherewithal means that there's a very clear path for a dividend hike to hit before the end of the year.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in the names mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji