5 Stocks Ready for Big Dividend Boosts
As it turns out, the scariest moments were fairly short-lived, and many companies bounced back and quickly saw profits rise to fresh heights.
Still, many of these companies have taken a go-slow approach when it comes to dividend hikes. They've been authorizing modest increases in the dividend, but at a rate that is far slower than profits have been growing. As a result, the payout ratio (which is dividend payments divided by net income) remains extremely low for many companies. They are paying out 10%, 20% or 30% of their income in the form of dividends, but could easily afford payout ratios in the 40% to 50% range.
History says they can do better. Wells Fargo calculates that companies in the S&P 500 paid out an average 53% of their profits in the form of dividends in the 30 years after World War II. That figure stands at 27% today. Back then the average dividend yield hovered in the 4% to 5% range. These days, we're talking 2.1%.
Software provider CA(CA) is a great example. Like other the technology companies, it never thought much about a dividend before, issuing a puny annual one of 16 cents. Well, it's just been super-sized to $1 a share (good for a 3.7% yield), and it could easily go to $1.50 a share in 2013 or 2014 and still represent a reasonable payout ratio.
Here's a look at five other companies that could be in for a huge dividend hike in coming years.
Nash Finch (NAFC) , a provider of wholesale and retail food distribution, has been focusing on paying down debt, which stood above $400 million back in 2005 and is now below $300 million and dropping. All the while, the annual dividend has been fixed at 72 cents, year after year, equating to a current payout ratio below 25%.
Though management aims to take debt down even more, Nash Finch's solid recurring cash flow should start to boost talk of a dividend hike. Investors are only mildly pleased with the current 2.6% dividend yield, but by taking the payout ratio up to 40%, that yield would quickly move above 5%.
Standard Motor Products
But investors can be count on solid profits; Standard Motor earned $1.07 a share in 2010 and $1.57 a share in 2011 (prior to a one-time tax gain). A slowly improving economy should help further the profit momentum, and analysts see the company earning around $1.70 a share this year and around $1.90 a share in 2013.