BALTIMORE (Stockpickr) -- Dividends have been a significant piece of the performance puzzle in 2015. With sluggish price action in the big S&P 500 index, dividends have added up to about 25% of investors' total returns so far this year.
And while it may seem like a stretch that dividends have accounted for a quarter of the S&P's gains in 2015, the 2015 numbers actually understate the long-term performance implications of owning dividend stocks. According to research from Morgan Stanley, dividends have contributed more than 41% of the stock market's total returns over the last eight decades.
In short, ignore dividends at your own peril this summer.
To find the biggest benefit from dividends, though, it's not enough to simply buy names with big payouts today. You've got to think about which names are going to be paying more 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, a low payout ratio and a history of dividend hikes. While those items don't guarantee dividend announcements in the next month or even 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 four big stocks that could be about to increase their dividend payments in the next quarter. Think of it as your dividend preview.
Up first on our list is $374 billion technology stock Microsoft (MSFT). Fifteen years ago, the idea of tech sector darling Microsoft as a dividend stock probably would have made most investors chuckle. After all, it didn't even begin paying a dividend until 2003. But in 2015, with a dividend yielding 2.7% at current price levels, Microsoft is an income investor favorite.
And it could be about to ratchet even higher on income investors' short-lists. Microsoft looks likely to hike its 31-cent dividend in the next quarter.
Microsoft may have a pretty disparate collection of businesses today, but software is still the firm's heart and soul. After all, the firm's Windows operating system and Office productivity suite contribute more than 75% of the firm's revenue -- and an even bigger share of profitability. That core business is extremely sticky, and it essentially provides a subsidy to the other "start-up" businesses that Microsoft operates.
From a financial standpoint, Microsoft is in excellent shape for a dividend boost. The firm currently carries more than $75.3 billion in net cash and investments, enough to pay for more than 20% of the firm's current market capitalization at current levels. That's a big risk reducer right now, and it gives Microsoft more than enough dry powder to boost its dividend payout this fall.
Microsoft was also featured recently in "Buy These 10 Best-of-Class Dow Jones Dividend Stocks."
PM data by YCharts
Philip Morris International
The $129 billion "sin stock" Philip Morris International (PM) is another big-name firm that's basically synonymous with dividend payouts. Right now, this big global tobacco firm pays a whopping 4.9% yield. And if history is any indication, Philip Morris International's hefty $1 quarterly dividend is likely to get a modest boost alongside earnings this September.
Philip Morris International has emphasis on the last part of its name: "International." The firm spun off from Altria (MO) back in 2008, in an effort to unlock extra value and break apart the lucrative ex-U.S. tobacco business from its parent. While tobacco sales in the U.S. are a dying business, it's a growth operation elsewhere -- particularly in emerging markets where PMI has huge exposure. Philip Morris International collects almost 30% of the global tobacco market with its brands, including Marlboro, Parliament and L&M.
A strong dollar continues to be a thorn in the side for PMI; wile the firm earns revenue in foreign currencies, it still has to report its financials in greenbacks. That said, the long-term uptrend in global cigarette sales in emerging markets is likely to outlast the current economic situation, which should unlock considerable growth at Philip Morris International.
This stock's dividend growth has been pretty consistent long-term, so investors should look for a raise this fall.
YUM data by YCharts
2015 may be off to a pretty lukewarm start for most stocks, but not so with shares of $40 billion fast food chain owner Yum! Brands (YUM). Yum! Brands has rallied more than 26% since the calendar flipped to January, outperforming the big S&P 500 index by a factor of 8.
U.S. investors best know Yum! Brands for its KFC, Pizza Hut and Taco Bell franchises. All together, the firm operates more than 41,500 locations across the globe, including more limited restaurant concepts for localized markets. Yum! is one of the most established quick-service brands in China, and first-mover status has afforded the firm a hefty economic moat in the People's Republic, where a growing middle class population is increasing consumption of restaurant food at rapid growth rates. That growth comes with significant profitability, too. Today, China makes up about 40% of Yum!'s operating profits.
Here at home, the firm's core franchise model throws off considerable cash, and Yum! has been successful at securing higher franchise fees from its store owners. Right now, Yum! pays out a 41-cent dividend that adds up to a 1.8% yield, but after four straight quarters of keeping that payout set, the firm looks likely to announce a dividend hike in the coming quarter.
CumminsCMI data by YCharts
Last up on our list of potential dividend hikers is $24 billion engine manufacturer Cummins (CMI). Cummins is one of the best-known names in diesel and natural gas engines, selling its components to a bevy of original equipment manufacturers, including Paccar (PCAR), Daimler and Fiat Chrysler Automobiles (FCAU). Right now, Cummins pays out a 78-cent dividend check each quarter that adds up to a 2.3% yield.
Look out for a boost to that dividend payout in the first week of July.
Cummins is a company in transition. The firm has been undergoing a major restructuring, an effort that's designed to cut costs and improve profitability. Cummins' diesel engines have a stellar reputation, and the firm's engineering group has consistently shown the ability to walk the tightrope between power (Cummins' engines are typically used in heavy-duty applications such as semi trucks, industrial generators and farm equipment) and government-mandated efficiency. As more vehicle makers look to outsource their diesel engine tech, the Cummins name is an attractive selling-point to source its components.
Lower crude oil prices should parlay into better sales for Cummins' engines, particularly in the U.S. automotive market, where the firm's powerplants are used in large consumer-grade trucks. With the clock ticking on how long interest rates will remain near zero, big-ticket purchases on the consumer and commercial sides should both see an added sense of urgency in the second half of 2015.
From a financial standpoint, Cummins is in good shape, with more than $1.3 billion in net cash and investments on its balance sheet. That, coupled with net profit margins approaching the double digits last quarter, should parlay into plenty of dry powder for a dividend hike this summer.