Don't look now, but some of Wall Street's biggest stocks look primed to announce dividend hikes in 2016.
As the big S&P 500 index teeters around 52-week lows in February, investors are getting a not-so-pleasant reminder about the importance of dividends. When markets turn sour, dividend payouts might just be your only source of returns. And while that's a little more obvious in markets like the one we're in right now, the fact is that over the long-term, dividends actually contribute almost half of all stock market performance.
According to research from Morgan Stanley, dividends have contributed more than 41% of the stock market's total returns over the last eight decades. But, 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.
Up first is tech giant Apple (AAPL - Get Report) . Like most other big stocks this year, dividends have been Apple's only positive source of returns in 2016, as the broad market continues to drag on just about everything. Luckily for Apple investors, this $537 billion technology stock has plenty of resources to ramp up those dividend payouts: $152.8 billion in net cash and investments at current price levels.
For now, Apple pays a 52-cent quarterly dividend that adds up to a 2.2% yield at current price levels -- and if history is any indication, shareholders are in store for a raise this quarter.
From a profitability standpoint, Apple dominates the technology sector. The iPhone and Mac earn higher profits than any competing products. For instance, while the iPhone only makes up an estimated 15% of all phones sold, Canaccord Genuity estimates that it accounts for 94% of the segments overall profits. The economics are similar for the Mac. Besides the brand cachet, Apple's earnings power comes from its closed software and hardware ecosystem. By optimizing software for its hardware choices, Apple can wring better performance out of devices that don't have outrageous specs. Likewise, the interoperability between devices and Apple-owned services like the iTunes media store encourages consumers to stay within the Apple product family to get the most utility out of their devices.
Put simply, Apple is cheap right now. On an ex-cash basis, shares trade for 7 times trailing earnings as I write, a bargain-bin valuation that only looks cheaper given the frothy multiples found elsewhere in this market. And a dividend hike is one of Tim Cook's best tools to convey that message to Wall Street in the quarter ahead. Investors should look out for about a 10% raise.
Apple is a holding in Jim Cramer's Action Alerts PLUS charitable portfolio. "Apple has been the subject of fierce debate following the company's recent earnings report, which -- although strong on the bottom line -- highlighted expected difficulties in the iPhone market," co-portfolio-manager Jack Mohr said. "We continue to reiterate our positive, long-term view on shares given the myriad of upcoming catalysts, massive cash balance at its disposal and exceptional management team."
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Home improvement retailer Home Depot (HD - Get Report) is the biggest in the business, with 2,269 big box locations throughout North America. An ebullient real estate market has provided Home Depot with a major tailwind in the last several years; as home equity values have stretched back into the black, homeowners have felt comfortable investing in projects again. At the same time shares are correcting in 2016, Home Depot is seeing record profits, and that fact is setting the stage for a dividend hike in 2016.
With a tailwind from the housing market at its back, Home Depot has been shifting its growth focus away from the DIY segment and more towards professional construction. Home Depot's share of the commercial market is tiny, and the firm is leveraging its huge scale to take advantage of the growth opportunity. The firm has also been expanding its service offerings, pairing professional services with consumers and collecting service fees and product revenue in the process.
Returning value to shareholders is nothing new. In the last five years alone, Home Depot has returned approximately a fifth of its market capitalization back to investors in the form of dividends and share buybacks. While shares aren't dirt-cheap here, that stat provides some serious perspective.
Currently, Home Depot pays a 59-cent dividend that adds up to a 2% yield at current levels. A dividend hike looks likely next week.
Mobile chipmaker Qualcomm (QCOM - Get Report) is another tech stock that looks primed for a dividend hike in the quarter ahead. This $73 billion communications tech maker is getting some attention to start the week, up 5% after an analyst upgrade switched this stock to a "buy" rating after a prolonged stretch of underperformance. That weak performance has turned Qualcomm into a bona fide high-yield dividend stock, with a 4.11% payout as of this writing.
Still, Qualcomm looks ready to give investors another raise here. In fact, Qualcomm's dividend payout ratio is the lowest it's been in more than five years.
Qualcomm designs and manufactures everything from mobile phone processors to wireless communication cards. The firm's premium Snapdragon processors provide OEMs with a completely integrated solution that can handle processing tasks, but also includes baseband features that connect to cellular networks. As handset makers continue to try to pack more features into the same device footprint, Qualcomm's expertise is increasingly valuable. That's reflected in the fact that the firm's processors power nearly every high-end smartphone outside the Apple and Samsung ecosystems.
Qualcomm's IP licensing business is substantial too. The firm's patents effectively mean that every handset maker in the world has to pay royalties if they want their phones to operate on 3G and 4G networks. That makes Qualcomm a great pure play on the smartphone market as a whole. While legal challenges have been major black clouds over Qualcomm's business, the sky appears to be clearing in this chip stock.
If history is any indication, we'll see a boost to Qualcomm's 48-cent quarterly dividend in early March.
Energy refiner Phillips 66 (PSX - Get Report) has been a shining beacon of success for energy sector investors over the past year. While the average energy sector ETF is down about 30% in the last 12 months, Phillips 66 is actually up 5% over that same stretch, outperforming the sector and even the S&P. That's because, as a refiner, Phillips 66 doesn't have as much exposure to the ebb and flow (mostly ebb lately) of energy commodity prices.
Phillips 66 is an independent refiner with 14 refineries that can process approximately 2.2 million barrels of oil per day. Phillips 66 also owns a stake in a midstream business with about 62,000 miles of pipeline, as well as a chemical joint venture that makes petrochemicals and plastics.
From a financial standpoint Phillips 66 is in excellent shape, with $6.5 billion in net cash and investments on its balance sheet. That huge cash cushion pays for approximately 15% of this stock's market capitalization at current price levels -- and it provides plenty of dry powder for Phillips to give dividend-seekers a raise in 2016.
For the time being, Phillips 66 pays out a 56-cent quarterly dividend that adds up to a 2.86% yield.
Last up on our list of potential dividend hikers is investment brokerage firm Charles Schwab (SCHW - Get Report) . Schwab, like the rest of the financial sector, has been pummeled year-to-date, shedding value as investors wring their hands over the uncertainty in the market. So Schwab is doing what any beaten-down stock with solid financials would do: it's boosting its dividend.
Right now, Schwab pays a 6-cent quarterly dividend check, a payout that hasn't been hiked since 2008. And not so coincidentally, Schwab's payout ratio has fallen to the lowest percentage of company profits in that eight-year stretch. That makes this broker a candidate for a dividend hike here.
Schwab made its mark as a discount broker, but like many peers, this financial stock has greatly expanded its reach, moving into banking and asset management services. One particularly interesting corner of the business is Schwab's new "robo-advisor" platform, Schwab Intelligent Portfolios. Hands-off investment management has been gaining popularity in recent years, and it should appeal to the same anti-stock emotion that's hampered Schwab's trading commission revenue over the long-term.
The prospect of higher interest rates is another potential benefit for Schwab investors. That's because brokerage firms typically earn a huge chunk of their revenues on float and margin interest -- two revenue sources that have fallen off a cliff thanks to low rates. Any rate hikes in the marketplace should have an outsized positive effect on Schwab's profitability.
In the meantime, another rate likely to see a hike is Schwab's dividend payout. Keep an eye out for a potential boost in the quarter ahead.