NEW YORK (TheStreet) -- Goldman Sachs is projecting that 46% of stock returns over the next decade will be from dividends. This is certainly good news for dividend investors. Unfortunately the stock market is trading at an elevated price-to-earnings ratio. As a result, total stock market returns are expected to average just 5% a year over the next decade.
The key takeaway from Goldman Sachs -- invest in dividend growth stocks. Dividend growth stocks will likely give investors better gains than the stock market in general over the next decade as dividends become more important to total returns. Dividend growth stocks are investors' best opportunity to take advantage.
Goldman Sachs recently added several new stocks to their dividend growth basket. Here are 10 of them:
Baxter (BAX) is a medical supply and biotechnology company with a market cap of over $37 billion and is the largest publicly traded medical supply business.
Baxter has paid steady or increasing dividends each year since 1984 (excluding the effects of spinoffs). The company currently has a dividend yield of 3% and a payout ratio of under 40%. Baxter's combination of a conservative payout ratio, long dividend history and high dividend yield bodes well for income-oriented investors. The company has compounded earnings per share at 13.9% a year.
Baxter's growth has come from new product sales and global expansion in both medical supply and biotechnology. The company's growth has been slower than expected over the last five years but the company has responded by proposing a spinoff its biopharmaceutical business to unlock value and create two companies, the second being a medical supplies business. The medical supplies business generated $10.7 billion in fiscal 2014 while the biopharmaceutical business generated $6 billion in sales in fiscal 2014. The spinoff is expected to be completed in 2015.
Baxter's stock currently trades at a price-to-earnings ratio of 20.1. The company is trading slightly below the S&P 500's current price-to-earnings ratio of 20.8. Baxter appears to be a sound investment relative to the overall market. The company has grown earnings per share significantly faster than the market over the last decade, has a higher dividend yield, and has a long history of success.
Cummins (CMI) designs, manufactures, distributes and services engines, selling its products in over 160 countries and generates about 50% of its sales internationally. The company currently has a market cap of around $26 billion.
Cummins has paid steady or increasing dividends for 25 consecutive years. The company currently has a dividend yield of 2.2%, which is slightly above the S&P 500's dividend yield. Cummins' payout ratio is just above 30%. The company's low payout ratio and long dividend history make it very likely that shareholders will see rising dividend payments going forward.
Shareholders of Cummins have realized rapid growth over the last decade. Cummins has compounded earnings per share at 14.3% a year over the last 10 years. The company has significantly increased margins over the last decade, from 5.5% in 2005 to 8.7% currently, thanks to a focus on reducing expenses.
The company has also been plowing cash flow into share repurchases, which increases earnings per share. Over the long run, demand for the company's products will drive growth. Earnings per share are expected to grow at around 9% a year over the next several years. The company's expected earnings-per-share growth of 9% combined with its current 2%+ dividend yield gives investors expected total returns of around 11% a year.
Cummins currently trades for a price-to-earnings ratio of 15.4. The company is trading at close to a 25% discount versus the overall market, despite having a higher dividend yield and a faster growth rate. Cummins shares make a compelling investment for dividend growth investors looking for exposure to the industrial goods sector.
Dr Pepper Snapple
Dr Pepper Snapple (DPS) was created in 2008 from a spinoff by Cadbury Schweppes. Dr Pepper Snapple is currently the fourth largest publicly traded beverage corporation in the United States based on its market cap of $14.8 billion. Only Monster Beverage (MNST), Pepsico (PEP) and Coca-Cola (KO) are larger.
Dr Pepper Snapple's value comes from its portfolio of well-known beverage brands. The company has increased its dividend payments each year since its creation and currently has a 2.5% dividend yield. The company has a payout ratio of 47%.
Dr Pepper Snapple saw adjusted earnings per share increase 14% in fiscal 2014 and is expecting constant-currency adjusted earnings-per-share growth of between 5.1% and 8.3% in fiscal 2015. The company's earnings-per-share growth combined with its dividend yield gives investors expected total returns of 7.6% to 10.8% in fiscal 2015.
Growth is coming unevenly from non-carbonated beverages. In the company's first quarter of 2015, carbonated beverage volume increased 3% while non-carbonated beverages grew 5%. The biggest volume gains came from the company's Clamato brand, which saw volume increase 20%. Dr Pepper Snapple's water brands saw volume grow 9% in the first quarter of 2015 versus the same quarter a year ago.
Dr Pepper Snapple is currently trading at a price-to-earnings ratio of 21.6, which is near the price-to-earnings ratio of its larger competitors. The company's price-to-earnings ratio reflects the company's portfolio of high-quality brands and above-average total return potential. Dr Pepper Snapple is likely either fairly valued or slightly overvalued at this time.
Harley-Davidson (HOG) is the only major United States heavy motorcycle manufacturer. The company also has a financing division to help customers finance its products, as well as an accessories and parts division. Harley-Davidson has grown to a market cap of $11.7 billion.
Harley-Davidson stock currently has a dividend yield of 2.2%. The company had to significantly reduce its dividend payments in 2009 from $1.29 the year before to 40 cents. The decision to reduce the company's dividend was prudent. Earnings-per-share fell from a high of $3.93 in 2006 to just 6 cents a share in 2009 during the worst of the Great Recession. Harley-Davidson's earnings-per-share in fiscal 2014 were $3.88 -- still not quite up to high's reached before the Great Recession. This illustrates the fact that Harley-Davidson performs poorly during recessions.
Harley-Davidson operates in a highly competitive industry. Intense motorcycle competition and a 1.3% decline in retail motorcycle sales negatively impacted Harley-Davidson's earnings in its most recent quarter. The company saw earnings per share increase 5% in its most recent quarter versus the same quarter a year ago, which was below expectations.
Long-term growth prospects remain bright for Harley-Davidson with its strong product pipeline and push to grow internationally and appeal to a younger audience. The company is expected to grow earnings per share between 8% and 11% a year over the next favorable years assuming the economy remains strong.
Harley-Davidson currently trades for a price-to-earnings ratio of just 14.3. The company traded for an average price-to-earnings ratio of 17 from 2011 through 2014. Shares of Harley-Davidson are likely undervalued at current prices. Any sort of good news for the company could increase the company's price-to-earnings ratio and cause share price appreciation.
AES Corp. (AES) is a global power company with generation and distribution businesses. The company currently has a market cap of $9.7 billion. In 2014 AES Corporation generated $17 billion in revenue. The company currently operates in 18 countries and has 18,500 employees.
AES generates 55% of its revenue in Central and South America, including 13% from Brazil. The company has operations in several emerging market countries including: Jordan, Kazakhstan, India, Sri Lanka, Vietnam, and the Philippines. AES Corporation generates less than 25% of its revenue in the United States.
The company is currently restructuring its operating areas to drive growth. In 2011 through 2013, AES divested most of its European operations and is using funds to pay down its high debt. The company currently has an interest coverage ratio of just 1.8 -- well below what is safe. Reducing debt will help reduce risk in the business. The company's current high debt level could prove to be disastrous if any unforeseen troubles arise.
The company's stock currently has a dividend yield of 2.9%, one percentage point higher than the S&P 500's dividend yield of 1.9%. AES started paying dividends in 2012. The company has increased its dividend payments each year since.
AES is projecting total returns of around 8% a year through 2018. It is building more power generation facilities which will drive earnings-per-share growth of around 5% a year. The high debt level and only modest total return presents an unfavorable risk/return relationship. The company simply does not offer high enough expected total returns to warrant an investment in a highly leveraged power generating business. Investors looking for exposure to stable utilities should look elsewhere.
Home Depot (HD) has grown to become the largest home improvement retailer in the world. The company now has a market cap over $145 billion and generates over $80 billion in sales a year.
Home Depot has paid steady or increasing dividends every year since 1998, currently a 2.1% dividend yield that is slightly above that of the S&P 500's. Home Depot's payout ratio is just under 40% but management is targeting a 50% payout ratio, leaving room for the company to grow dividend payments faster than earnings-per-share growth. The company's long history of dividend growth combined with its reasonable payout ratio make it very likely that investors will see rising dividends from Home Depot in the future.
Home Depot (and competitor Lowe's (LOW)) have largely saturated the home improvement market in the United States so growth will not as easily as it did in the past. The company is opening 6 new stores in 2015 - 5 in Mexico and 1 in Canada. The fact that Home Depot is not opening any new stores in the United States in 2015 speaks to the saturation in the market.
The company is still expecting earnings-per-share growth of 8.5% to 10% for 2015. Home Depot is seeing comparable store sales growth rise as the housing market continues to recover. The more people buy homes, the more home improvement products Home Depot sells. It is also growing through increasing margins.
Home Depot also boosts earnings per share through massive share repurchases. Home Depot has reduced its shares outstanding by 5.3% a year over the last decade. Investors can expect long-term earnings-per-share growth of 7% to 11% from Home Depot. Growth will come from share repurchases (~5%), dividends (~2%), and business earnings growth (0% to 4%).
Home Depot stock traded for a price-to-earnings ratio below that of the S&P 500 for much of 2003 through 2011. Since that time, the company's stock has traded at a premium to the S&P 500. Home Depot exists in a cyclical market. When the economy is growing and more consumers are buying houses, the company does well. When a recession occurs and the housing market declines Home Depot sees declines in earnings. The best time to pick up shares of Home Depot is during weak housing markets -- not during strong housing markets.
International Paper (IP) is a global paper and packaging company. The company manufactures and sells its products in North America, Europe, Latin America, Russia, Asia and North Africa. It spun off its North American logistics business, XpedX, in July of 2014 to become Veritiv Corporation (VRTV) . International Paper also closed its paper mill in Courtland, Ala., because of falling demand for paper.
International Paper currently has a 3% dividend yield. The company pays out the bulk of its earnings as dividends, although earnings are expected to rise significantly over the next couple of years. It also has a relatively large amount of debt on its balance sheet. The company recently refinanced some of its debt, pushing the maturity back further. International Paper reduced its dividend payments from $1 in 2008 to 33 cents in 2009.
International Paper's printing paper business is seeing volume decline. The company's industrial packaging and consumer packaging segments have room for growth. International Paper currently generates 69% of its income from its industrial packaging segment, and another 9% from consumer packaging. International Paper is using its cash flows to reduce its debt burden and acquire smaller paper and packaging businesses in emerging markets including India, Brazil, and Turkey. The company is expected to see solid earnings-per-share growth over the next several years as it continues to streamline its operations.
International Paper is trading for a price-to-sales ratio of just under 1. The company's forward price-to-earnings ratio is 12.5. International Paper does carry higher-than-average risk, which is reflected in its low price-to-sales ratio and low forward price-to-earnings ratio.
Regions Financial (RF) is one of the larger full-service regional banks in the United States. The company operates about 1,650 banks in the Midwest, South, and Texas. It has a market cap of $13.9 billion.
The bank currently has a 2.3% dividend yield that is higher than the S&P 500's current dividend yield of 1.9%. Regions Financial has a long history of paying dividends and was a "Dividend Aristocrat" from 1998 through 2008. The company had to reduce its dividend payments in 2008, 2009, and 2010 due to the Great Recession. Regions Financial lost nearly two-thirds of its book value per share during the Great Recession.
The company expects its loan portfolio to grow 4% to 6% in fiscal 2015, driven by underlying economic growth in the region the company serves. Regions has reduced non-interest expense every year since 2010 and plans to consolidate 50 branches in fiscal 2015. The company is also spurring growth through share repurchases. Regions Financial has been repurchasing shares since 2012. Share repurchases will help the company to grow earnings-per-share at a faster clip.
Regions Financial is currently trading for a price-to-earnings ratio of 14.2. The company has the lowest price-to-earnings ratio of any mid-cap or larger regional bank in the Southeast and appears to be undervalued relative to its peers at current prices.
Seagate Technology (STX) is the world's largest manufacturer of hard-disk drives. The company is based in Ireland to take advantage of lower taxes but has its principle offices in Cupertino, Calif. Seagate Technology has a market cap of $17.5 billion.
Seagate paid increasing dividends from 2003 through 2008 but reduced its dividend in 2009 and completely eliminated dividends in 2010. The company reported a loss of $231 million in 2009 during the worst of the Great Recession. Seagate reinstated its dividend in 2011 and has paid increasing dividends each year since. The company's most recent dividend increase bumped dividend payments by more than 26%. The current payout ratio is just 33%, giving the company much room to grow dividends faster than earnings.
Seagate has compounded revenue per share at 11.5% and earnings per share at 15.2% over the last decade. Earnings are actually expected to decline next year. The company is facing heavy competition from rivals in the memory storage market.
Seagate's current valuation reflects its uncertain future. The stock is currently trading at a price-to-earnings ratio of just 9.6 and the company is undervalued at current prices. It currently has a 3.9% dividend yield. While the company's future is uncertain, the price-to-earnings ratio is sufficiently low to offset uncertainty risk. The company's high dividend yield gives investors the chance to earn current income while seeing what the future holds for Seagate Technology.
National Oilwell Varco
National Oilwell Varco (NOV) is the largest supplier of equipment for drilling in the oil and gas industry and has grown to a market cap of more than $19 billion. The company is one of Warren Buffett's highest-yielding dividend stocks.
National Oilwell Varco's operations are split into 4 segments. The percentage of revenue generated by each segment in fiscal 2014 is shown below:
- Rig Systems: 42%
- Wellbore Technologies: 24%
- Completion & Product Solutions: 20%
- Rig Aftermarket: 14%
Low oil prices will impact on National Oilwell Varco's fiscal 2015 earnings. Oil companies are cutting back on capital expenditures and will purchase fewer rig and drilling systems. National Oilwell Varco's stock has fallen more than 30% in the last year due to low oil prices, which has driven down the company's price-to-earnings ratio to 9.60.
National Oilwell Varco's management is taking advantage of falling share prices and using a portion of the company's $3.5 billion in cash on hand to repurchase shares to creates shareholder value.
National Oilwell Varco is trading well below fair value with a price-to-earnings ratio well under 10. The company currently has a robust 3.7% dividend yield, which should appeal to income oriented investors. National Oilwell Varco combines value and a high dividend yield and the company's stock has significant upside when oil prices rise.