2016 is turning into a salient reminder that dividends still matter a lot, even if you don't fancy yourself an income investor. Year-to-date, dividends have accounted for approximately a third of the broad market's total returns in the S&P 500, which means that investors who've eschewed dividends this year have also missed out on a meaningful chunk of their portfolio's performance.
And as obvious as dividends' contribution has been in 2016, it only becomes more apparent in the longer-term.
In fact, just over the last ten 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.
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.
We're starting off with a stock that tips the scales as one of the highest-yielders in the S&P 500: telco giant AT&T (T) . Coupled with a transformative mergers and a Fed that's continually postponed hiking interest rates, that high-yield status has actually translated into a substantial rally for shares of this communications giant. Year to date, AT&T is 14% higher than it started, leaving the rest of the broad market in its dust.
AT&T is one of the biggest telcos on the planet. The firm effectively owns a duopoly with main rival Verizon (VZ) in the U.S. mobile phone space, claiming more than 100 million wireless subscribers. AT&T is also the incumbent fixed-line provider in a big chunk of the country, providing phone, internet, and TV services in 21 states.
The acquisition of DirecTV earlier this year adds another 20 million U.S. satellite TV subscribers to the company's Rolodex, giving AT&T a bigger base to market its lucrative triple-play services and levering up the firm's bargaining power with content owners.
Scale provides an important competitive advantage for AT&T and Verizon. With more than 100 million wireless subscribers apiece, the companies can afford to invest more into their infrastructure than second-tier carriers, de-commoditizing a service that some investors have worried it becoming a commodity. That's especially true in more rural areas where other carriers may not feel an investment is worthwhile. Historically, AT&T has been an excellent provider of shareholder yield through its big dividend payout. Currently, that 48-cent quarterly dividend adds up to a 4.9% yield at current price levels, but AT&T looks on track to give investors a raise in the months ahead.
$100 billion pharma firm AbbVie (ABBV) is another high-yield mega-cap that's been outperforming the market in 2016, in large part because of its 3.7% dividend yield. Since the start of the year, AbbVie has handed investors total returns of 8%, putting the stock on track to end 2016 up double-digits. The good news for dividend-seekers is that AbbVie looks likely to post a raise to its 57-cent quarterly payout this fall.
AbbVie is a biopharmaceutical firm that focuses on immunology and oncology treatments. Those are high-demand areas in the biopharma arena, and there's ample opportunity for AbbVie to apply its current drugs to new indications.
Immunology drug Humira is AbbVie's biggest blockbuster drug by far, and indications in rheumatoid arthritis, psoriasis, and Crohn's disease should help to fuel growth while adding life to its patents. Meanwhile, other drugs like cancer treatment Imbruvica have the potential to take some of the onus off of Humira in the years ahead.
Financially, AbbVie is in solid shape, with a reasonable amount of balance sheet leverage, $9.4 billion in cash and investments available to put to work, and a dividend payout that's supported by drug cash flows. If history is any indication, AbbVie shareholders should expect a raise this quarter.
Industrial powerhouse Emerson Electric (EMR) has been a favorite among income investors in recent years, dishing out a quarterly 47.5-cent dividend check that totals up to a 3.8% annual yield at current price levels. Emerson has held that dividend check steady for the past four straight quarters, which means that it's about time for the firm to give investors a bigger paycheck in 2016.
Emerson owns a diverse portfolio of business units that manufacture electric motors, valves and switches, air conditioning compressors and tools. The firm also provides process automation products and services that help industrial customers accomplish tasks without human intervention. In many ways, Emerson's positioning makes it a big play on the industrial sector, which means that its fortunes ebb and flow with the broader economy. That's been a challenge in the last year and change, but as investors slowly grow more confident in the industrial sector Emerson should continue to attract dollars to its stock.
One of the black clouds over Emerson that's recently started to abate has been its exposure to the energy sector. As oil and gas prices rebound, Emerson's sales to customers in the energy business have snapped back as well. The pending sale of Emerson's network power unit, plus the pending purchase of Pentair's valves and controls business should help to ramp up this stock's exposure to the higher-margin process automation business, freeing up even more cash for shareholders in the long-run.
One of Emerson Electric's big customers in the energy sector is oil and gas giant ConocoPhillips (COP) , one of the biggest of the exploration and production stocks. ConocoPhillips also happens to be another high-yielder that looks primed to announce a dividend hike in the near-term. For the time being, ConocoPhillips currently pays out a 25-cent quarterly dividend check that adds up to a 2.5% yield at current price levels.
As I mentioned a moment ago, ConocoPhillips is one of the biggest E&Ps there is: Last year, the firm produced 913,000 barrels of oil and gas liquids in addition to 4.1 billion cubic feet of natural gas on a daily basis. There's more where that came from as well - the firm's proven reserves stood at 8.2 billion barrels of oil equivalent at the end of last year. The decision to unload its midstream operations back in 2012 was poorly timed, but it still makes ConocoPhillips a pure-play E&P stock, positioning that should pay off better than most similar-sized producers as oil prices rebound.
Oil production, much like dividend payouts, is driven by cash flows, not profitability. In other words, while ConocoPhillips and peers have seen margins squeezed negative by lower oil prices, they've been able to maintain positive cash flows at the well-side, keeping dividend payouts intact (and growing) even if that performance is masked by the GAAP accounting numbers. A dividend hike would be an effective way for ConocoPhillips to relay that message in the months ahead.
Last up on our list of potential dividend hikers is another commodity-driven stock: Nucor (NUE) . Nucor is the largest integrated steelmaker in the U.S. by volume, and it's been one of the biggest beneficiaries of the rebound in metals prices this year. Since the calendar flipped to January, Nucor has rallied more than 17%, with dividends dragging that performance stat up above 20%.
Nucor is an integrated steelmaker. That means that the firm is involved in every step of the production process from collecting scrap to manufacturing fabricated steel products. The firm's production capacity of 27 million tons creates some big scale advantages at Nucor, as does its low-cost scrap-processing arm. Nucor also operates mini-mills running electric arc furnaces, which can output steel products at a significantly lower cost than conventional blast furnaces that are industry-standard.
Even though the steel business is extremely challenging, Nucor has proven itself to be an outstanding operator. Nucor has only posted one annual loss in the last five decades, an impressive feat that speaks both to management's cost discipline and the strength of the company's dividend. Currently, Nucor pays out a 37.5-cent quarterly dividend that works out to a 3.2% yield at current price levels - but if history is any indication, investors should be on the lookout for a raise announcement before the calendar flips to 2017.