BALTIMORE (Stockpickr) -- The combination of interest rates at all-time lows and dividend payouts at all-time highs is creating a pretty good time to be a stock income investor -- if only because other traditional income sources can't measure up.
Right now, U.S. firms hold around $2 billion in cold, hard cash. That's more of a problem than it may sound like. After all, management teams need to put that cash to good use (that is, with meaningful rates of return). That's a challenge in an environment where interest rates are effectively zero.
But dividend payouts provide a way for the C-suite to generate shareholder returns instantly with their cash. So U.S. stocks have been hiking their dividend payouts to catch up.
Does a few extra cents each quarter really matter to your investment returns? You'd better believe it.
According to research from Wharton Professor Jeremy Siegel, reinvested dividends account for as much as 97% of total market performance. Better yet, dividends even impact how big your capital gains are. Over the last three and a half decades, dividend stocks have outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, all while paying out cash to their shareholders, based on data compiled by Ned Davis Research.
In recent months we've had some stellar success in jumping in front of future dividend increases just by zeroing in on a few key factors. Now we'll look at our crystal ball and try to do it again.
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, especially as investors start to get antsy about whether or not 2013's rally will be able to hang on.
Without further ado, here's a look at five stocks that could be about to increase their dividend payments in the next quarter.
Verizon
Communications giant Verizon (VZ) is the league leader in just about every business it operates: The firm boasts the biggest landline network in the country, the biggest wireless network in the country, and arguably the fastest residential broadband solution in the country in FiOS. That collection of services is key for one very big reason: Verizon's cross-selling opportunities are massive.
Capital allocation hasn't been a problem for VZ. The firm has massive (and growing) infrastructure, and expansion and upkeep come with some serious costs. Verizon has done a good job of reducing its total debt by selling off non-core businesses, leaving more cash available to pay for current operations -- and for dividends. For many consumers, Verizon is synonymous with wireless. The firm's mobile phone arm provides service to around 100 million customers across the U.S., but unlike top rival AT&T (T), VZ only owns 55% of its cellular business.
And while it works to convince its minority partner to sell their stake, VZ is sitting on a whole lot of balance sheet liquidity. That leaves room for the firm to reward patient shareholders with a dividend hike. Right now, VZ pays a 51.5-cent quarterly dividend that adds up to a 4.24% yield. Shareholders could see a raise happen this fall.
Altria Group
Even Verizon's ample dividend looks tepid compared with the 5.1% payout over at tobacco and alcohol firm Altria Group (MO). Altria is the biggest tobacco company in the U.S., led by its flagship Marlboro brand. Its other businesses include cigars and smokeless tobacco, Ste. Michelle Wine Estates and a massive stake in SABMiller (SBMRY). In short, Altria is a textbook "sin stock" -- and that's proven heavenly for shareholders in the wake of the Great Recession.
Altria's business is stable, it's predictable, and it's massive. But that's not going to last for long. The fact is, the firm's business is slowly dying as demand for tobacco products continues to decline in the U.S. While international sales continue to show growth, especially in emerging markets, MO long ago spun its overseas business into Phillip Morris International (PM). But with a gradual decline in cigarette sales already priced into shares, MO's substantial cash flows and increasing exposure to the beverage business provide some shareholder consolation.
Altria's SABMiller stake, for instance, adds up to around $7 per share for MO, providing reduced risk for a material chunk of the firm's balance sheet. After all, the alcoholic beverage business remains hot right now. Investors should continue to expect Altria to payout the majority of its cash flows to investors for the foreseeable future. That makes a hike to its 44-cent dividend look likely in the next quarter.
Nike
Nike (NKE) has enjoyed some strong performance in 2013, rallying more than 23% year-to-date on investors' hopes of a global recovery. Nike is the athletic shoe company -- the firm is the largest designer, manufacturer and distributor of shoes and apparel in the world. The athletic apparel stock is also one of the most popular brands in the world, with its "Swoosh" emblem able to hike the price of any T-shirt or baseball cap it's printed on.
While the start of football season should help to spur the fruits of Nike's new five-year apparel contract with the NFL, Nike's true growth potential hinges on growth in the middle classes of China, India, and Latin America. As upwardly mobile consumers seek out attainable status symbols, Nike's products are right in front of them.
From a financial standpoint, Nike's balance sheet is immaculate. The firm carries around $6 billion in cash that offsets a "paltry" $1.3 billion debt load. While shares are hardly cheap at NKE's current valuation, the firm's revenue trajectory makes up for it. Currently, Nike pays out a 21-cent quarterly dividend for a 1.32% yield; investors should look for a hike to that payout in the near-term.
International Paper
As its name implies, International Paper (IP) is one of the largest paper and packaging manufacturers in the world, supplying corrugated packaging and free-sheet paper to North America and the emerging market. Still, North America represents that vast majority of IP's business -- the firm earns 75 cents out of every dollar here at home, positioning that leaves some big growth opportunities open overseas. Manufacturing operations in a basket of the most attractive developing economies gives it a key foot in the door to accomplish that growth.
I'll admit that paper isn't exactly the most exciting business. But it can be lucrative – after 2008, staid paper makers sported insanely cheap valuations that ultimately led to some of the S&P 500's rebound gains. And while IP isn't as bargain-priced as it was then, the stock is far from expensive. International Paper spent recent years becoming a less integrated paper firm, unloading around $10 billion worth of timberland assets and buying other firms' paper and packaging units instead. That change has spread out IP's capital needs and put operations more in-line with the ebb and flow with the economy.
A balance sheet with very high replacement value and a substantial share of the North American market help pave the way for a dividend hike at IP in the next quarter. Right now, the firm pays a 30-cent quarterly yield that adds up to a 2.5% yield.
Activision Blizzard
Last up on our list of potential dividend increasers is video game publisher Activision Blizzard (ATVI). It may seem like a video game maker isn't the ideal type of firm to look to for a dividend hike -- but Activision's case is a bit different. That's because a huge chunk of ATVI's sales come from recurring subscription fees rather than sales of game titles. That subscription revenue is predictable -- and predictable revenues and dividends to hand-in-hand. Right now, ATVI pays out a 19-cent dividend that adds up to a modest 1.1% yield.
Activision Blizzard owns some of the hottest video game franchises in the world, including Call of Duty, World of Warcraft and Diablo. What's unique about ATVI's positioning is the exposure to subscription-based multiplayer games such as World of Warcraft. With WoW, for instance, some 8 million subscribers pay a monthly fee to play the game online with other players in real time. Because gamers have a massive sunk cost in building characters and attaining status, they're a lot less likely to switch to a competing franchise and restart the process.
A debt free balance sheet and $4.5 billion in cash make the case for a dividend hike stronger in ATVI. That cash position covers a full quarter of the firm's market capitalization, greatly reducing the risks of being a buyer in this video game maker. Look for a dividend hike in the next quarter.
To see all of this week's Rocket Stocks in action, check out the Rocket Stocks portfolio at Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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