Given that dividend growth stocks allow investors to earn progressively higher income over time, investing in dividend growth stocks can enable investors to realize higher total returns over long-term investment horizons. According to BlackRock, “dividend growth has been a key driver of total return in the long run.” A recent Société Générale study found that “dividend growth was the single largest contributor to nominal returns across key developed markets over the past 40 years.” In addition, stocks of companies that increase dividends over time have a tendency to outperform other stocks, even high-yielding dividend stocks with no dividend growth. BlackRock finds that “dividend growth stocks tend to outperform most other asset classes in periods of low or no economic growth.” This consideration is particularly relevant in the current macro environment characterized by low rates of economic growth.
There are many dividend growth stocks, but only a limited number can afford to boost dividends at high rates. We take a look at five dividend stocks that have just raised their payouts by double digits. These stocks include Phillips 66 (NYSE:PSX), Corning Inc. (NYSE:GLW), Accenture Plc (NYSE:ACN), Lockheed Martin Corp. (NYSE:LMT), and International Paper Company (NYSE:IP). These five stocks are large-cap stocks with dividend yields in excess of 2% and dividend payout ratios between 13% and 53%.
Phillips 66 (NYSE:PSX): This $28-billion downstream energy company, the largest U.S. petroleum refiner and a spin-off from ConocoPhillips (NYSE:COP), has just raised its quarterly dividend by 25% to $0.25 per share. With the latest increase, the stock is currently yielding 2.2% on a low payout ratio of 13%. Its peers Marathon Petroleum Corporation (NYSE:MPC) and Valero Energy Corporation (NYSE:VLO) pay dividend yields of 2.6% and 2.4%, respectively. Phillips 66 started paying dividends in the first quarter of this year. The company’s EPS is expected to grow at an average annual rate of 6.0% per year for the next five years. The company will use ample liquidity to invest in the expansion of midstream operations and chemicals business, so as to benefit from the surge in the output of natural gas and natural gas liquids. In addition to dividends, the company is boosting shareholder value through a share-buyback program worth $1 billion. The stock has a forward P/E and a price-to-book ratio below its peer group averages. The company’s price-to-sales ratio is negligible and lower than that of its industry on average. Its free cash flow yield is high at 12.4%, while it also boasts a high ROE of 20.2% and return on invested capital [ROIC] of 14.5%. The stock is one of Warren Buffett’s top energy sector picks.
Corning Inc. (NYSE:GLW) The $19-billion maker of specialty glasses, ceramics, and related materials for application in the display, environmental, and telecommunications technologies has just raised its quarterly dividend by 20% to $0.09 per share. At this payout rate, the stock is yielding 2.8% on a payout ratio of 25%. Corning’s competitor Sumitomo Electric Industries Ltd. (SMTOY.PK) is paying a dividend yield of 2.4%, while Furukawa Electric Co., Ltd. (FUWAY.PK) is not paying dividends. Over the past five years, the company’s EPS expanded at an average rate of 8.8% per year. Analysts forecast that the company’s EPS will grow at a somewhat lower rate of 3.6% per year for the next half decade. Corning’s quarterly dividend has increased cumulatively by 80% since August 2011. The company’s LCD glass segment has suffered due to an oversupply in the market, which caused a collapse in pricing and, thus, an adverse effect on earnings. The demand for Corning’s products is likely to benefit from the strong growth in mobile computing devices, although its PC- and notebook-related business will see some headwinds due to a secular decline of the PC market. Some analysts consider that Windows 8, due to its focus on touch screen technologies, will be a positive catalyst for the stock. Corning has a free cash flow yield of 3.7%, ROE of 10.5%, and ROIC of 9.1%. As regards its valuation, the stock is trading below its respective industry. Billionaire Richard Chilton is bullish about the stock.
Accenture Plc (NYSE:ACN) The company is a $44-billion management consulting, technology services, and outsourcing firm. It has raised its semi-annual dividend by 20% to $0.81 per share. Including the latest hike, the Accenture stock is currently yielding 2.3% on a payout ratio of 42%. Its peers Infosys (NASDAQ:INFY) and IBM (NYSE:IBM) are yielding 1.8% and 1.6%, respectively. Over the past five years, the company’s EPS and dividends grew at average annual rates of 14.3% and 28%, respectively. Analysts forecast that Accenture’s EPS will expand at an average rate of 10.5% per year for the next five years. The company has some $6.6 billion in cash and equivalents and has no long-term debt. The company has a broad geographic reach and the mix of services. It generates high returns, with its ROE and ROIC of 63%. The stock has a free cash flow yield of 6.1%. Accenture has shown a great commitment to increase shareholder value vis-à-vis dividend growth and share buybacks. In fact, since 2004, Accenture has reduced its outstanding shares by 27%, which has contributed to EPS growth. As regards its valuation, on a forward P/E basis, the stock is trading slightly above its competitors Infosys and IBM, but below its peer Wipro Ltd. (WIT). Fund manager Anand Parekh (Alyeska Investment Group—check out its top picks) initiated a $1.6 billion position in the stock in the second quarter.
Lockheed Martin Corporation (NYSE:LMT) This $30-billion defense, security, and aerospace company is the largest U.S. defense contractor by revenue. The firm has just upped its quarterly dividend payout by 15% to $1.15 per share. With the latest dividend hike, the stock is yielding a high 4.9% on a payout ratio of 53%. Its peers Northrop Grumman Corporation (NYSE:NOC), Boeing Inc. (NYSE:BA), and Raytheon Co. (NYSE:RTN) are yielding 3.2%, 2.4%, and 3.6%, respectively. Over the past five years, amid a decline in government spending, the company’s EPS and dividends grew at average annual rates of 6.3% and 23.4%, respectively. The company is expected to grow its EPS at an average rate of 7.1% per year for the next five years. The company’s future performance depends on the outcome of the U.S. fiscal austerity and the process of sequestration. Still, despite weaker defense spending, the company has fared reasonably well. The stock has a free cash flow yield of 2.5%, an exceptionally high ROE of 128%, and ROIC of 33%. On a forward P/E basis, the stock is trading below the aerospace industry. Specifically, it is trading at a discount to Boeing, but at a premium to Northrop Grumman and Raytheon. Among fund managers, value investor Jean-Marie Eveillard is the largest hedge fund investor in the stock.
International Paper Company (NYSE:IP) This $16-billion market leader in paper and packaging boosted its quarterly dividend by 14.1% to $0.30 per share. With the latest dividend hike, the stock is yielding 3.3% on a payout ratio of 48%. Its peers Domtar Corporation (NYSE:UFS), Packaging Corp. of America (NYSE:PKG), and Rock-Tenn Co. (NYSE:RKT) yield 2.3%, 2.8%, and 1.1%, respectively. Over the past five years, the company’s EPS and dividends grew at average rates of 2.4% and 1.0% per year, respectively. Analysts forecast EPS growth averaging about 6.0% per year for the next five years. The booming online sales are increasing the demand for cardboard products, boosting paper/packaging sector revenues. The recently increased containerboard prices are sticking. Following the company’s dividend boost, Citigroup analysts reiterated their buy rating on the stock, convinced that “further dividend increases are in play, assuming continued execution against (IP’s) long-term earnings goals… IP targeted a dividend payout at 30%-40% of free cash flow, implying $1.45-$1.95 per share (annual dividend target) against “mid-cycle” earnings to be achieved in 3-4 years. Near-term, (Citigroup) views the (latest) dividend hike as a clear positive, as IP is demonstrating conviction in the sustainability of its cash flows.” The stock has a free cash flow yield of 6.1%, ROE of 16.6%, and ROIC of 5.7%. On a forward P/E basis, the stock is trading below its respective industry. Fund manager David Cohen (Iridian Asset Management—see its main holdings) and billionaire Ken Griffin are big fans of the stock.
