For income-focused investors, finding stocks that offer solid dividend yields today is great, but finding ones that look well-positioned to grow their payouts substantially is even better. Such companies might not have the highest yields right now, but over time, they could become dividend stars in your portfolio.
If you're looking for stocks that could double their dividend payouts, there are three key characteristics to target:
- Very low dividend payout ratio
- Potential for relatively high earnings growth
- Approaching the end of a high-growth phase in the next few years
For a company to double its dividend, it will need to generate cash flows well in excess of the current dividend payout. Otherwise, it simply won't have the resources to cut those larger checks to shareholders. Further, companies with high-growth opportunities usually aren't good candidates to radically increase their payouts. Instead, they tend to invest their cash into marketing, hiring new employees, developing new products, and building out corporate infrastructure. Therefore, the companies that are most likely to double their payouts will still be growing faster than the average dividend payer, but will also be nearing the end of their high-growth phase.
These three companies all fit those criteria.
Warehouse club operator Costco (NASDAQ: COST) has more than 804 stores that offer a wide array of products to its members. Most brick-and-mortar retailers with such diversified offerings and wide geographic footprints would struggle to achieve a high growth rate, but Costco is a rare exception. It has averaged annual top-line growth of close to 9% over the past few years. The company continues to open new locations, and investors are thrilled with a membership retention rate that routinely exceeds 90%.
Costco also adeptly handled the challenges of the pandemic in 2020, as well as heated competition from Amazon (NASDAQ: AMZN) and Walmart‘s (NYSE: WMT) online sales channel. The warehouse giant's e-commerce sales grew by nearly more than 80% year-over-year in its most recently reported quarter. All of this makes Costco a great candidate to deliver above-average growth in its category of mass retailers.
Income investors won't be too excited by Costco's dividend, which at current share prices yields 0.8%. However, the retailer's normal payout ratio has hovered around 30% in recent years, which is low in comparison to most dividend stocks. Further, the company generated such excellent cash flows last year that it paid a $10 per share special dividend in December — its fourth bonus distribution in eight years. If Costco continues along its forecast earnings-growth trend line, management may decide to substantially increase its regular payout.
Skyworks Solutions (NASDAQ: SWKS) provides semiconductors that are used in wireless devices, and its exposure to the 5G boom has translated into stellar financial results and investor optimism. The company had been unable to achieve consistent revenue growth for several years leading up to fiscal 2020, but that has changed. It reported 16% and 69% year-over-year revenue growth in the past two quarters, respectively.
Skyworks supplies components that are used in mobile phones, cars, and connected household devices. Its chips are also deployed in aerospace, defense, medical, and industrial applications. As 5G connectivity becomes more prevalent, new generations of devices will hit the consumer and commercial markets to take advantage of these new high-speed data networks. That's a short-term driver for Skyworks, and it's fair to expect continued strength in the company's results.
Skyworks currently pays a quarterly dividend of $0.50 per share. That's only a 1% yield, but at that level, its annual payout will be less than 20% of the consensus EPS forecast for the company's fiscal 2021. That low payout ratio and the company's growth outlook suggest that management could easily double the distribution without impacting the company's financial health or expansion plans.
Tractor Supply (NASDAQ: TSCO) operates a chain of nearly 2,000 retail stores that sell a broad range of products related to farming, ranching, pet care, gardening, and home improvement. It's coming off a huge year of rising same-store sales and growth in its e-commerce channel. Total sales increased 27% in 2020, and net profits rose 33%.
It's unlikely that the chain will achieve that rate of growth again in the next few years, but it should still thrive as the pandemic's influence declines and the U.S. economy expands.
The company raised its quarterly dividend from $0.40 per share to $0.52 per share in February, but it could go even further. Even after that increase, its yield is still only 1.2%. A $2.08 per share annual payout would only amount to 31% of analysts' consensus EPS estimate for 2021. If Tractor Supply meets expectations, it will produce more than enough cash to justify another sizable dividend hike.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Ryan Downie owns shares of Amazon and Skyworks Solutions. The Motley Fool owns shares of and recommends Amazon, Costco Wholesale, Skyworks Solutions, and Tractor Supply. The Motley Fool recommends the following options: long January 2022 $1920.0 calls on Amazon and short January 2022 $1940.0 calls on Amazon. The Motley Fool has a disclosure policy.