Image source: Getty Images.
Dividend stocks can be the foundation of a great retirement portfolio. Not only do the payments put money in your pocket, which can help hedge against any dips in the stock market, but they're usually a sign of a financially sound company. Dividends also give investors a painless opportunity to reinvest in a stock, thus compounding gains over time.
However, not all income stocks live up to their full potential. Using the payout ratio -- i.e., the percentage of profits a company returns to its shareholders as dividends -- we can get a good read on whether or not a company has room to increase its dividend. Payout ratios between 50% and 75% are ideal. Here are three income stocks with payout ratios currently below 50% that could potentially double dividend payments.
Among the three giants that income seekers should be eyeing this week is America's leading pharmacy by market share, CVS Health (NYSE: CVS).
CVS Health has run into a bit of a brick wall in recent months. First, the company came under pressure with the expectation that Hillary Clinton wound win the presidency. Clinton was expected to take a hard-line approach with drug companies, which in turn could have adversely affected CVS' highly profitable pharmacy segment.
More recently, CVS lowered its full-year adjusted profit guidance to a new range of $5.77 to $5.83 in fiscal 2016, from a previous forecast of $5.81 to $5.89. The drop itself is pretty marginal, but it was the CEO's commentary following its third-quarter earnings release that caused some serious indigestion on Wall Street. CEO Larry Merlo stated: "[V]ery recent pharmacy network changes in the marketplace are expected to cause some retail prescriptions to begin migrating out of our pharmacies this quarter." In other words, competitors are eating into CVS' highly profitable pharmacy segment, which has Wall Street modestly worried.
Image source: CVS Health.
However, if you look at the longer-term picture, there's still a lot to like. For instance, the push to generic medications, along with CVS' leading market share, should allow it to win the battle on sheer volume. The QuintilesIMS Institute for Healthcare Informatics is estimating that the percentage of generic prescriptions written will grow from 88% in 2015 to 91% or 92% by the end of the decade. Even Merlo was quick to point out that pharmacy weakness in Q3 is typical of seasonal prescription patterns.
CVS Health also has a long-tail growth opportunity from America's aging population. It's no secret that people are living longer than ever, and the U.S. Census Bureau is projecting that the elderly population could nearly double between 2012 and 2050. With elderly Americans more likely to need prescription medicines than younger adults, this means a steady increase in drug demand over the next three-and-a-half decades.
CVS Health is currently paying out $1.70 annually (2.3% yield), but looks to be on track to deliver more than $7.50 in earnings per share by 2019. Given its aforementioned long-term growth trends, it looks like a solid candidate to double its dividend.
Another income stock dividend seekers would be wise to put on their radar is combat-ship developer General Dynamics (NYSE: GD).
The biggest concern with a company like General Dynamics is that, as is true throughout the defense sector, its business is strongly dependent on the U.S. federal budget. Whichever party controls Congress can have a large influence on its growth prospects.
But the surprising good news for General Dynamics is that Donald Trump won the presidential election, and he'll inherit a Republican-led Congress. Republicans have a storied history of advocating for a lot of defense spending, and Trump made numerous suggestions during his campaign that his views are the same.
Image source: U.S. Navy.
Trump has pledged to grow the U.S. Army to 540,000 active soldiers, increase the number of Air Force fighters to 1,200, expand the Navy to more than 350 ships, and boost the Marine Corps to 36 battalions, a better than 50% jump from where things stand now. With General Dynamics servicing both the Navy and Marine Corps, it would appear that the company could be a prime beneficiary of a Trump presidency and an increased defense budget.
General Dynamics also has a monstrous backlog that investors should factor in. It ended the third quarter with $62 billion in backlog, which works out to about two full years of revenue. This backlog comes on top of record margins for its aerospace segment and 17% profit growth for its information systems and technology operations.
The company clearly hasn't forgotten about its shareholders, either. General Dynamics has repurchased 11.2 million shares through the third quarter, and it's paying out $3.04 annually, which is good enough for a 1.8% yield. Considering that Republicans will likely aim to boost defense spending, and General Dynamics is already on track for over $11 in full-year earnings per share by 2019, it also looks to be on track to double its dividend within a decade or less.
Finally, dividend investors may want to keep their eyes on money-center behemoth Citigroup (NYSE: C), which looks poised to benefit from a Trump presidency.
Among the big U.S. banks, few have been in worse shape since the Great Recession than Citigroup. Citigroup's toxic loan portfolio crushed the company following the housing bubble, and its somewhat heavy reliance on Europe relative to its peers has dragged down its bottom line. But things could be about to change.
One of the most exciting expectations of Trump's presidency is that it could mean an easing of certain banking regulations, including the end of Dodd-Frank. Deregulating the banking sector would give banks additional pathways to make money, and it would certainly reduce costs related to oversight. It's unclear how much of an impact that would have on Citi's bottom line, but make no mistake, it would be positive.
Image source: Getty Images.
More importantly, Trump's free-spending economic plans have created a bond-market exodus over the past week and change. There's a belief among a number of Wall Street pundits that Trump's plans for the economy, which entail steep corporate and individual income tax cuts and the authorization of $1 trillion in infrastructure spending over a 10-year period, could lead to faster U.S. GDP growth, and thus higher inflation. This has been pushing the dollar and bond yields higher. In other words, we have the perfect recipe for future Fed rate hikes, which would lead to more net interest income for banks, and the ability for Citi to boost its credit-card interest rates as well. According to Citi's most recent quarterly filing, a 100-basis-point move higher in short- and long-term rates would increase its net interest revenue by $2 billion.
All the while, Citigroup has repurchased 117 million shares year to date, and it's pushed its tangible book value to nearly $65 per share. With Citi paying out $0.64 annually (1.2% yield), but remaining on track for $6 in earnings per share by 2019, it's not hard to envision this banking giant getting clearance from the Fed to dramatically increase its dividend payout in the years to come.
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