In the end, dividends made all the difference in 2015. That's because the S&P 500's dividend payout was enough to bring the big index's total returns from a small loss to a small gain. On an absolute basis, we're not talking about a big difference in returns -- but for a year when every basis point counted, 2015 was an important reminder that dividends can add up to some pretty meaningful performance.
That's particularly true over the long term.
According to research from Morgan Stanley, dividends have contributed more than 41% of the stock market's total returns over the last eight decades. The good news is that, with record cash on corporate balance sheets right now, dividend checks are only getting bigger in 2016.
As firms compete with rising interest rates from the Fed this year, expect to see dividend payouts get hiked across the board as an incentive for income investors to stay in stocks. 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 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, 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 big stocks that could be about to increase their dividend payments in the next quarter. Think of it as your dividend preview.
Johnson & Johnson
Up first is health care giant Johnson & Johnson (JNJ - Get Report) . If there's ever been a prototypical blue chip stock, this $278 billion firm is it. Johnson & Johnson is the biggest and most diversified health care stock on the planet, positioning that looks particularly attractive considering the health care sector's outperformance in the last few weeks.
For the moment, J&J pays out a 75-cent dividend check each quarter, adding up to a 3% yield at current price levels.
Johnson & Johnson has a presence in nearly every corner of the health care space. The firm owns a collection of well-known brands that includes names like Band-Aid, Tylenol, Neutrogena and Acuvue. And it's the less consumer-centric names, such as J&J's pharmaceutical and medical device units that are the real cash cows. By spreading revenue across a wide spectrum of dissimilar businesses, Johnson & Johnson reduces risks for investors, particularly as regulatory changes threaten the health sector.
From a financial perspective, Johnson & Johnson is in great shape. The firm currently has more than $17.5 billion in net cash and investments on its balance sheet, enough to pay for more than 6% of the firm's outstanding shares at current price levels.
That huge cash cushion also leaves management with enough dry powder to hike its dividend in the coming quarter. After four straight quarters with a 75-cent payout, J&J looks likely to announce a bigger check for investors in the months ahead.
The last year has come with some solid performance for specialty retailer L Brands (LB - Get Report) . Since last January, this $27 billion mall staple has managed to climb 12.8% higher, vs. a 0.31% decline in the S&P 500 over that same stretch. That's in addition to L Brands' 2% annual dividend payout. And that performance gap could be about to get even wider, as L Brands' dividend looks likely to get increased in the coming quarter.
L Brands is one of the biggest names in specialty retail. The firm's store brands include Victoria's Secret, Bath & Body Works, Henry Bendel and La Senza -- more than 3,619 store locations, in addition to online and catalog sales channels. The flagship store chain in L Brands' portfolio is Victoria's Secret, followed closely by Bath & Body Works. The intimate apparel and soap and fragrance chains account for approximately 90% of sales -- and both offer extremely high margins with equally high levels of consumer stickiness.
Likewise, the vast majority of L Brands' sales come from North America. The company has been conservative about expanding overseas, a strategy that's proven fruitful thanks to the strength of the dollar in recent years. But with only around 5% of sales coming from abroad, this stock has a big opportunity to move the growth needle in unsaturated markets further down the road.
Shares have paid out a 50-cent dividend for the last four straight quarters now. If history is any indication, investors should expect a raise in the next month.
Nothing goes together quite like garbage and dividends. That may seem like a strange statement -- unless you're an investor in Waste Management (WM - Get Report) , that is. Waste Management is one of the biggest trash collection companies on the planet, with more than 252 landfills, nearly 300 transfer stations and 21 million customers in the U.S. and Canada. The firm is also a consistent dividend payer, yielding better than 3%. It's also a consistent dividend hiker, with a steady stream of annual dividend increases going back to the first quarter of 2004. The firm looks likely to boost its 38.5-cent dividend payout in the month ahead.
Waste Management's size is a big advantage. The firm's big geographic footprint means that the firm is able to service larger national accounts that smaller operators in this fragmented industry can't bid on.
The firm's sale of its Wheelabrator waste-to-energy business in 2014 was well-timed, coming at the same time that conventional energy prices began to plummet. Longer-term, the firm's remaining energy assets provide attractive exposure – and an attractive intangible for customers that want to work with green companies (on a similar note, Waste Management is also the biggest recycler in the country).
If history is any indication, investors should be on the lookout for a 1-cent0per-share quarterly dividend hike in February.
T. Rowe Price Group
Baltimore-based asset management firm T. Rowe Price Group (TROW - Get Report) is one of the biggest in the business, with more than $726 billion in assets under management at last count. As that AUM number has steadily grown over the last several years, so too have T. Rowe's management revenues -- and its dividend payout. Right now, T. Rowe Price pays out a 52-cent quarterly dividend that adds up to a 3% yield.
T. Rowe Price's specialty is in retirement accounts, In the aggregate, retirement funds add up to approximately two-thirds of the firm's total assets. One of its biggest growth drivers has come in the form of retirement-date funds, which automatically adjust their asset mix based on a specific "maturity" date. As more millennial-age investors put more assets into retirement accounts, T. Rowe Price's retirement date funds should continue to be an attractive hands-off approach.
Reputation matters in the investment business, and T. Rowe Price's standing in the industry is top-notch (so much so that the firm's longstanding mascot is nicknamed "Trusty the Ram"). The firm eschewed risk during the financial crisis of 2008, opting for lower volatility in retiree accounts over the temptation of bigger gains. 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.
If history is any indication, T. Rowe investors should see a dividend hike sometime in February.
Dr. Pepper Snapple Group
Last up on our list of potential dividend hikers is Dr. Pepper Snapple Group (DPS) . This $17 billion beverage stock has been a phenomenal performer in the last year, rallying more than 30% since this time back in 2015. Factor in dividends, and this stock's total returns swell to 34% over the trailing 12 months.
And that number looks like it's heading higher in 2016 thanks to a possible dividend hike in the month ahead. Currently, Dr. Pepper Snapple pays a 48-cent quarterly dividend that adds up to a 2% yield.
DPS' brands include namesake Dr. Pepper and Snapple, as well as labels like 7UP, A&W, and Hawaiian Punch. While bigger rivals Coke (KO - Get Report) and Pepsi (PEP - Get Report) battle it out for the biggest part of the non-alcoholic beverage market, DPS has been finding success owning a smaller niche (and avoiding competing on cola).
DPS is largely vertically integrated in many markets, manufacturing, bottling and even distributing its own products. The firm does rely on third-party bottling partners for approximately 40% of its volume, but the remaining 60% is completely handled in-house. The strong dollar hasn't been a challenge for Dr. Pepper Snapple Group. If anything, it's given the firm a profitability edge over its competitors. That's because the firm's product rights are limited to the North American market, where the U.S. is its biggest revenue generator by far. That concentrated customer base gives DPS the ability to focus on a smaller geographic footprint, keeping costs lower.
Investors should keep their eyes peeled for a potential dividend boost this quarter.