Two-and-a-half months into 2016 and, generally speaking, investors are no better off than they started. As I write, the big S&P 500 index is a little over 1.3% below breakeven for the year, effectively extending 2015's sideways grind for almost another quarter at this point.
Put simply, when stocks go sideways, dividends matter.
For instance, the $1.3 billion ProShares S&P 500 Dividend Aristocrats ETF (NOBL) , which owns large, consistent dividend payers, is up 3.4% so far since the calendar flipped to January. If NOBL's performance were to keep up at that pace, investors are looking at a 17.8% rate of return in 2016.
And that's not an uncommon occurrence, either. 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. Even better, we'll focus our search on potential dividend hikers that are actually "working" in 2016, providing positive capital gains and dividends year-to-date.
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 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.
It's not much of a revelation that investors haven't had much love for energy stocks lately. As spot prices for energy commodities have sold off, so have the share prices of just about any company with a passing exposure to oil or gas.
But what many investors may not realize is that integrated energy giant Exxon Mobil (XOM) has actually been holding up pretty well in spite of the pressure. Factor dividends in, and shares are actually up slightly in the trailing 12 months. Better still, Exxon has been outperforming in 2016, up 7.2% so far this year on a total returns basis.
Exxon is the biggest company in the energy business, with reserves of approximately 25.3 billion barrels of oil equivalent. Last year, the firm produced an average of 2.1 million barrels of gas and oil liquids, and another 11.1 billion cubic feet of natural gas per day. Exxon also owns substantial refining and specialty chemical businesses, operations that have been picking up the slack lately as margins on production have backslid.
In spite of $36 oil prices, integrated supermajors like Exxon can handle the pullback. After all, much of their costs-per-barrel are sunk at existing wells, and cash flows at well sites are a more important metric to watch here. Likewise, side businesses, like transportation and refining, continue to be profitable despite the rout in oil prices. Those facts make Exxon the most defensive stock in the energy sector -- and after four straight quarters with a 73-cent per share quarterly dividend check, management is likely to signal that strength with a dividend hike.
Exxon's cash flows from operations easily cover its dividend payouts several times over right now, and with investments slowing in this environment, there's more cash available for shareholders. If history is any indication, investors will get a raise at the end of next month.
Bank of America
U.S.-based banking giant Bank of America (BAC) started the year off on an extremely sour note, shedding more than 19% of its market value in 2016. But BofA has been rebounding more recently -- and investors are likely to see a dividend hike in the coming quarter as shares pick up steam again. For the time being, Bank of America pays a 5-cent quarterly dividend, a payout that's remained unchanged since the summer of 2014.
Bank of America is proof that bigger isn't always better. The firm's outsized bets during the financial crisis have taken years to unwind, costing investors billions of dollars in value along the way. But after years of being the shakiest of the big banks, Bank of America is finally starting to see many of its black clouds dissipate. BofA's core business is likely to continue to provide attractive returns, especially now that the least attractive pieces of its loan book have been charged off. Longer-term, rising interest rates have the potential to generate thicker net lending margins for the firm.
BofA is a unique dividend payer because of the fact that the company doesn't have the final say on dividends. The Fed does. Like other systemically important financial firms, Bank of America needs the Fed's blessing before returning more capital to shareholders. But with an improved business, and after a long stretch without a raise, the dividend is likely to get bigger in 2016.
Bank of America is a holding in Jim Cramer's Action Alerts PLUS charitable trust portfolio. "We remain on the sidelines for now but reiterate our $16 price target, which incorporates the expected EPS revisions while allowing for longer-term upside from a valuation perspective," wrote Cramer and Research Director Jack Mohr on Friday. "We remind subscribers that the stock is high-risk/high-reward, and should only be owned with a high level of risk tolerance."
Exclusive Look Inside:
You see Jim Cramer on TV. Now, see where he invests his money and why Bank of America is a core holding of his multi-million dollar portfolio.
Want to be alerted before Jim Cramer buys or sells BAC? Learn more now.
It's been an interesting year for industrial conglomerate United Technologies (UTX) . First the firm closed its $9 billion cash sale of helicopter giant Sikorsky Aircraft to Lockheed Martin (LMT) in November, banking the biggest aerospace M&A deal since 2012. Then, Honeywell (HON) came in with a $101 billion cash and stock offer to buy the rest of the business. United Technologies balked at Honeywell's bid over regulatory concerns (and an inadequate offer price), leaving the firm with a pile of cash to hand to shareholders.
That makes United Technologies another large-cap candidate for a dividend hike in the quarter ahead. Right now, the firm pays out a 64-cent quarterly dividend check that adds up to a 2.7% yield.
Without Sikorsky in its stable of brands anymore, United Technologies' remaining aerospace business is focused on components, not complete aircraft. The firm has found substantial success in getting OEMs to use more components per aircraft from them. The firm's current brands include engine giant Pratt & Whitney, and UTC Aerospace Systems. On the building and construction side, United Technologies owns Otis elevator and a large commercial HVAC, fire and security product manufacturing business.
Shares of United Technologies are finally catching some momentum in 2016. The stock is up 12% in the last month, half again as much as the rest of the S&P. That swing to buyer control bodes well for this stock heading into the second quarter.
It's still early, but $48 billion big box retailer Target (TGT) is having a strong year in 2016. Since the calendar flipped to January, shares have rallied 12.5%, leaving the rest of the S&P 500 in their dust. And management looks likely to ratchet this stock's total returns even higher in the quarter ahead with a dividend hike. For now, Target pays a 56-cent quarterly dividend check that adds up to a 2.7% yield.
Target is one of the biggest retailers in the U.S., with 1,790 locations spread from coast to coast, and close to $74 billion in sales last year. The firm's core customer is squarely middle-class, a focus that's been squeezed in the last couple of years, as most growth has either moved upmarket or down-market and away from the middle. Even so, Target's positioning still provides unique selling proposition today, something that most other retailers can't offer -- and that gives Target the ability to differentiate on more than just price. For instance, Target has long been at the top of the class in higher-margin private label sales -- approximately 20% of sales are Target's own private label products. That's a fact that keeps margins strong and customers coming back.
Target has been plagued by missteps in recent years, from a notorious data breach to an ill-fated attempt to enter the Canadian retail market. As those facts fade in investors' memories, expect Target to start getting the benefit of the doubt from Wall Street again, especially given Target's smaller size than gargantuan peers (and its ability to meaningfully move the growth needle as a result).
Target is another holding in Jim Cramer's Action Alerts PLUS charitable trust portfolio. Cramer and Research Director Jack Mohr rate the stock a Two, meaning they would buy in on a pullback. "We do believe in the long-term story," they wrote on Friday. "Our hesitation lies with the near-term ceiling on shares."
Exclusive Look Inside:
You see Jim Cramer on TV. Now, see where he invests his money and why Target is a core holding of his multi-million dollar portfolio.
Want to be alerted before Jim Cramer buys or sells TGT? Learn more now.
Capital One Financial
Last up on our list of potential dividend hikers is financial services firm Capital One Financial (COF) . Since the financial crisis of 2008, Capital One has made the attractive transition from being a niche credit card company to a full-blown bank holding company. By acquiring troubled regional banks during the financial crisis, Capital One increased its access to cheap deposits, and entrée into secured lending products like mortgages and auto loans. Today, the firm is one of the 10 largest banks in the U.S., based on assets.
Credit cards remain a key part of Capital One's profitability. With other lenders have seen returns tamped down by record-low interest rates, outsized exposure to higher interest rate credit card lending has helped keep profits high. At the same time, Capital One has been able to take advantage of stronger economic conditions to boost the credit quality of its loan books, resulting in below-average charge-offs.
Like Bank of America, Capital One stands to benefit from a potentially upward trajectory in interest rates from the Fed in 2016. In fact, it stands to benefit better than most peers given its exposure to variable-rate revolving credit lines. If credit tightens here, expect card utilizations to creep higher, padding Capital One's coffers even more.
Right now, Capital One Financial pays out a 56-cent quarterly dividend. After four straight quarters of that stable payout, investors are likely to see a raise in the coming quarter.