September's up-and-down market action is sending an important reminder to investors: Dividends still matter in this market.
Year-to-date, dividends have contributed more than 35% to the S&P 500's total returns. That's a material piece of performance you'd be missing if you don't own dividend stocks. And that performance gap only gets wider over the long term. In fact, just over the last 10 years, dividends have accounted for almost half of the S&P 500's performance, handing investors the difference between 66.5% gains and 106.2% gains when reinvested dividends are factored in.
Clearly, dividends matter in this market, even if you don't fancy yourself an income investor.
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 coming months. Think of it as your dividend preview.
Up first on our list of potential dividend hikers is pharmaceutical giant Merck (MRK) . Merck has been a stellar performer in 2016, up more than 17% since the calendar flipped to January -- and that performance isn't slowing any signs of slowing down as Merck remains within grabbing distance of 52-week highs. On the dividend front, Merck currently pays out a 46-cent quarterly payout that adds up to a 3% yield at current price levels -- and investors should be on the lookout for a raise in 2016.
Merck is one of the biggest pharmaceutical firms on the planet, with $39.5 billion in sales last year. That sales number has actually been backsliding in recent years, thanks to a patent cliff that's caused losses of blockbuster drugs like Singulair. But it's not all bad. Merck's drug pipeline is one of the strongest in the industry right now, thanks in part to the acquisition of Schering. That fact should reverse the trend of slowing revenues in the next few years at the same time management's latest cost-cutting efforts help to boost the bottom line.
Merck is in good shape from a financial standpoint. The firm currently carries $23.7 billion in cash and investments, enough to offset nearly all of the firm's $24 billion debt load. That ample cushion of financial reserves means that Merck is able to continue to make tactical purchases this year -- and that it's able to continue boosting its dividend payout.
After four straight quarters of the same payout, Merck looks likely to hand investors their next raise in the next quarter if history is any indication here.
American Express (AXP) is benefitting from increasing spending and consumer borrowing in 2016. On average, loan balances are up 13% in the last year, a shift that signals higher long-term revenues for AmEx. That's particularly true if the Fed musters the courage to raise interest rates in the year ahead.
American Express operates one of the biggest payment networks in the world, as well as a credit and charge card issuance business. The global shift towards electronic payments has been a rising tide for all ships in recent years, but Amex's premium positioning and growing partnership deals should give it better-than-average growth potential. American Express' credit quality is above-average, with only 1.1% of all loans past due. That high quality debt along with deep transaction data on an affluent cardholder base make AmEx the card company that rivals want to be.
Factors such as the firm's deep integration with corporate customers' expense management and accounting software, as well as one of the most attractive pools of discretionary spenders among cardholders, both serve as an economic moat for AmEx. It's inconvenient and costly for companies to switch card networks, even if the costs of American Express are slightly higher than peers.
American Express has paid out the same 29-cent quarterly dividend check for the past five straight periods. From here, a raise looks likely for investors. Keep an eye out for the potential announcement later this month.
Yum! Brands (YUM) is a company in transition. The firm is spinning off its Yum China unit, a deal that's expected to be completed next month. The transaction will turn this fast food chain into a pair of attractive quick-service restaurant stocks, one with a focus on China and the other operating in the rest of the world. In the meantime, the firm continues to operate as a single business with 42,692 locations globally.
Yum! owns a collection of recognizable fast-food brands, including KFC, Pizza Hut and Taco Bell. The vast majority of those stores (approximately 96%) will be franchised locations following the spinoff of the China business. The franchise model is particularly attractive for income investors because it gives Yum exposure to stable cash flows at the same time that it dramatically reduces risk exposure to the balance sheet.
The business will change dramatically following the spinoff. China contributed about 19% of sales last year, but it added up to 34% of adjusted profits. While the transaction will cut into Yum!'s profitability, the firm is still one of the most profitable companies in the industry, and investors will retain ownership in shares of Yum China.
Look for management to remind investors about Yum!'s profitability through their wallets .After four quarters of a 46-cent dividend check, Yum looks likely to announce a dividend boost as soon as this week. That, plus the forthcoming spinoff deal, make Yum! worth paying attention to in the weeks ahead.
American Electric Power
Nothing goes together quite like dividends and utility stocks…
Case in point: American Electric Power (AEP) . This $32 billion electric utility has been in rally-mode this year, up more than 11.5% since the calendar flipped to January thanks to the prolonged low interest rates that have made high-yield stocks (like power utilities) look attractive on a relative basis. Add in dividends, and that 2016 performance number gets a lot higher: AEP is up 14.5% on a total returns basis.
American Electric Power operates power generation, transmission and distribution assets in 11 states, serving more than 5 million customers between them. Most of AEP's $16 billion in revenue is generated in just three states: Ohio, Texas and Virginia. By stacking most of its operations in states with friendly regulatory environments, AEP has been able to grow at an attractive rate.
AEP has been monetizing some assets in recent years, jumping on the utility trend of offloading non-regulated revenues. The firm just announced plans to sell four Midwest power plants for $2.17 billion, a deal that looks attractive to American Electric Power both because of the deal price and the reduced exposure to merchant generation at a time when investors are valuing consistent regulated utility revenue. Investors should expect more similar deals down the road. Meanwhile, AEP looks likely to share the wealth with shareholders. Right now, the firm pays out a 56-cent quarterly dividend check that adds up to a 3.45% yield at current price levels.
American Electric Power is a holding in Jim Cramer's Action Alerts PLUS charitable portfolio. Shares outperformed last week "as the company announced an agreement to sell four competitive power plants (i.e., non-PPA assets) for roughly $2.17 billion," wrote Cramer and Research Director Jack Mohr on Friday. "Investors have been waiting for this decision as the company looks to de-risk its profile and focus on regulated assets. The company will provide further details on how it plans to use the proceeds at its investor conference on Nov. 1, but we expect further investments in regulated businesses and potential share buybacks."
Last up on our list of potential dividend hikers is alcoholic beverage stock Brown-Forman (BF.B) . Kentucky-based Brown-Forman owns some of the best-known brands in booze, including Jack Daniel's, Finlandia, Woodford Reserve and Korbel. In total, the firm sold more than 360 million liters of alcoholic beverages to customers in more than 160 countries.
Brown-Forman's Jack Daniel's brand is the company's crown jewel -- and offshoots from it, such as cinnamon-flavored Tennessee Fire, higher-end Gentleman Jack and the single barrel collection, have been lucrative ways to tap that brand recognition for growth. Whiskey is Brown-Forman's biggest single segment, and a resurgence of interest in the spirit (particularly at the higher end) is helping to fuel upside. While last quarter's earnings results came in below expectations, Brown-Forman's long-term trajectory remains up and to the right.
This beverage stock has paid out a 17-cent dividend check for the last four straight quarters. If history is any indication, investors are likely to see a raise in mid-November, just ahead of second-quarter earnings for fiscal 2017. While the 1.5% dividend yield that shares currently trade for doesn't quite make it a dividend stock, that payout has still been a material contributor to performance over the last decade, providing almost half of this stock's long-term total returns.