At a glance, 2016 looks like a pretty unimportant year for stocks so far. Year-to-date, the big S&P 500 index is holding out just below breakeven, and it's been in the same general vicinity for most of the year at this point.
Or at least that's what most investors think.
Add dividends into the mix, and Mr. Market begins to tell a different story. For instance, the S&P 500 Total Return Index, which includes the impact of reinvested dividends on the S&P's price, actually set a new record price back in April. In other words, even though most investors missed it, the S&P actually quietly hit new all-time highs this year.
The key takeaway here is that dividends matter. For anyone with an intermediate or long-term timeframe, dividends can quickly add up to the biggest contributor to your total returns. 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, 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 coming months. Think of it as your dividend preview.
Leading things off today is railroad giant CSX (CSX - Get Report) . Plummeting oil prices have been a major challenge for CSX in the last 18 months. Since the start of 2015, shares have lost nearly a third of their market value. Lower energy prices mean that less efficient but more convenient modes of transport, such as truck freight, become economically viable. And that puts the squeeze on rail freight volumes.
CSX may not have much control over oil prices, so it's been working at improving the things it does have control over. For instance, the company has been working hard to improve its financial efficiency numbers, cutting unnecessary costs, as well as improving on-time stats. Those efforts should only become more important as oil prices rebound and incentives move more in favor of rail transport once again. With rail shipments on average four times more efficient per ton-mile, it doesn't take much of an increase in energy prices for railroad operators such as CSX to see big boosts in demand.
Macro factors aside, CSX is one of the biggest railroad companies in the world, with nearly 21,000 miles of track focused in the Eastern half of the U.S. Currently, the firm pays out an 18-cent quarterly dividend that adds up to a 2.8% yield at current price levels. CSX has been a regular dividend hiker, and investors should be on the lookout for a raise in the quarter ahead.
Discover Financial Services
Dividends have been the only source of returns for shareholders in $22 billion financial firm Discover Financial Services (DFS - Get Report) . Shares have hung out around breakeven since the start of the year, and the firm's 2.09% dividend has been the only thing keeping DFS' price above water. The good news is that investors look likely to see a raise this summer.
In the meantime, Discover pays a 28-cent quarterly dividend that's been unchanged for the last five quarters…
Discover Financial is a consumer banking stock that operates its own set of closed-loop card networks, from the eponymous Discover brand to networks like PULSE and Diners Club. Discover is both the card issuer and the network for the majority of cards it issues, but it's gone the way of larger closed-loop peer American Express (AXP - Get Report) in recent years, opening up the network to third-party banks to grow fee revenues without levering up risks.
Like many of its peers in the credit card issuing business, Discover has built out a banking business in recent years, scoring itself a source of extremely cheap deposits that it can lend out to card customers at much higher rates. Likewise, with rates hovering around multi-year lows at the moment, Discover's big, well-underwritten loan book has the potential to become a lot more valuable as variable rates on card products float higher.
Candy giant Hershey (HSY - Get Report) is another potential dividend hiker to put on your radar for this summer. Hershey has announced dividend increases for the last three consecutive summers, boosting its payout by nearly 38%. And, following four straight quarters of paying a 58.3-cent quarterly dividend check to investors, Hershey looks ready to post its next dividend raise for investors in the month ahead.
Hershey is the biggest candy maker in the U.S., with almost half of the country's chocolate market. The firm's biggest brands include names like Reese's, Kit Kat and Twizzlers in addition to its popular namesake products (about 80 different products in total). Hershey's sales aren't limited to the U.S. market, however. About 15% of the company's top-line comes from sales in some 70 different countries.
Candy is a category that's less likely to get pressured by store brands, and that makes Hershey's leading market share unlikely to be challenged on grocery shelves. As Hershey's profits have tracked higher, this stock's dividend payout ratio has dipped below its historic average in 2016. That fact makes a dividend hike look more likely heading into the summer months.
One man's trash is another man's treasure -- that's the message that waste management company Republic Services (RSG - Get Report) is sending to investors in 2016. Since the calendar flipped to January, this $16 billion trash collection trade has seen its share price rally nearly 9% on a total returns basis, beating the rest of the market by a big margin. A meaningful piece of that performance equation has been dividends. Currently, Republic pays out a 30-cent quarterly dividend that adds up to a 2.5% yield at current price levels.
Republic Services is the number-two waste management company in the U.S., with 340 individual collection companies and nearly 200 landfills. The trash business has a reputation for being "recession-proof," and while that may be overstating just how much downside protection Republic and peers can provide for your portfolio, waste management stocks are more defensive than most, exposure that could be valuable as investor anxiety levels remain high.
Historically, Republic has done a good job of returning capital to shareholders. Since 2010, dividend growth has averaged 7% a year, and the company has also materially reduced its share count with buybacks. That shareholder-centric track record adds some precedent to the likelihood that we'll see a boost to Republic's payout this summer. Odds are we'll see the company's quarterly dividend hit 32 cents per share in July.
Last on our list of potential dividend hikers is J.M. Smucker (SJM - Get Report) . Smucker has become one of the biggest packaged food companies in the country. Besides its namesake jam brand, the firm owns Folgers coffee, Jif peanut butter, Milk-Bone and Kibbles 'n Bits. Substantial acquisitions, such as Folgers in 2008 and Big Heart Pet Brands in 2015, have materially shifted Smucker's business in recent years, but the firm has been good at selecting targets so far.
The more recent big bet on pet food brings pet products to nearly a third of annual revenues in 2016, big exposure to a market that's growing and generating healthy margins. Smucker is still a very U.S.-centric stock. Approximately 90% of sales are generated in the U.S., and while that's certainly been good in the face of a stumbling U.S. dollar, there's still quite a bit of low-hanging fruit if the firm decides to position more resources on growing its existing brands abroad.
Right now, Smucker pays out a 67-cent quarterly dividend check, a payout that's remained unchanged for the last four straight quarters. If SJM's dividend history is any indication, investors should look out for a raise that's likely to hit in the next few months. In the meantime, the firm's dividend checks add up to a 2% yield at current price levels.