Income mutual funds focused on dividend growth can be good sources of ideas about what’s hot and what’s not in the dividend growth-focused investing of the professionally managed money. Dividend growth investing has been especially appealing for income investors in the low-yield environment, in addition to this particular market-beating strategy. This has been the case because dividend yields complemented with dividend growth rates often well exceed the rate of inflation, providing for meaningful real income returns. In contrast,fixed-income securities such as government bonds have recently been offering paltry yields that made dividend growth stocks more appealing.
Below is a closer look at five stocks that professional mutual funds’ portfolio managers were adding to their portfolios in recent months. All these stocks yield more than 2% and are selected for review due to their dividend growth potential.
Whirlpool Corporation (NYSE:WHR), world’s largest appliance seller, is in for a bright future, particularly as household incomes in emerging markets grow with rebounding economies. Analysts peg its long-term EPS CAGR at a superb 28.1% for the next five years, which should allow for robust dividend growth, given the company’s low payout ratio of 26% of the current-year EPS estimate. While the stock’s yield is relatively low at 2%, the ample room for dividend growth makes it appealing for dividend growth investors. What’s more, the stock is trading at only 11.4x forward earnings, providing for an exceptional value.
For obvious reasons, global demand for Whirlpool Corporation (NYSE:WHR)’s products has been lackluster in recent years, but the outlook has improved along with the rebound in the U.S. housing market and pent-up replacement demand, which is expected to play out over the medium-term period. The company’s strength is its broad geographic exposure and strong brands, as it markets products in nearly every country and has six brands valued at more than $1 billion. Whirlpool Corporation (NYSE:WHR) boasts a large opportunity in terms of market penetration in emerging markets, especially in India, China, and Latin America, where the company has average penetration of less than 10%, about 20%, and less than 40%, respectively.
The company has been producing solid operating profits, propped up by an improving operating margin due to fixed-cost cutting, improving productivity, and product innovation. Product price and mix have also helped boost financial performance. The trend is likely to continue, as the company aims at expanding its operating margin through cost cuts and sales improvements to 8% by 2014 (from the first-quarter’s 6%), extending into the future the streak of five consecutive quarters of year-over-year improvements in operating margins. These trends will support strong underlying cash flow generation in 2013 and beyond, providing sufficient room for robust dividend growth.
Norfolk Southern Corp. (NYSE:NSC) is one of the ultimate dividend growers. This rail transportation company makes the ranks of the very few dividend stocks that have achieved average dividend growth of more than 10% for at least 10 consecutive years. In fact, Norfolk Southern Corp. (NYSE:NSC) has raised its dividend at a 21% CAGR over the past decade and it boasts 11 consecutive years of dividend growth. The company’s strong operational performance has enabled such dividend growth. Notwithstanding the deep coal traffic slump in recent years, Norfolk Southern Corp. (NYSE:NSC) was able to achieve its best ever operational performance in the past two years, with record revenues, operating income, net income, and EPS in 2011, followed by the second-best year on record in 2012.
The outlook continues to be dreary for coal shipments, due to the coal’s weak position amidststrong competition from cheaper natural gas, higher stockpiles, and weaker export markets, mainly in Europe and Asia. However, Norfolk Southern Corp. (NYSE:NSC)’s growth is supported by stronger intermodal and merchandize rail traffic. Intermodal traffic is receiving a boost from continued opportunities for highway conversion and growth with international shipping companies. To support growth in this segment, Norfolk Southern Corp. (NYSE:NSC) is launching new intermodal traffic terminals and service lines. On the other hand, the housing market strength, auto industry growth, and oil output expansion and transportation are buoying the rail merchandize segment. These positive trends should continue, as the robust population growth will support doubling of freight traffic by 2050.
Aside from the economically driven fundamentals, the company is also realizing cost efficiencies that are supporting its bottom line. Its indicators of crew starts, re-crews, train and engine service overtimes, and carloads/units per locomotive, have all been increasing at a solid clip.Moreover, Norfolk Southern Corp. (NYSE:NSC)’s bottom line is buttressed by respectable share buyback activity, including the last authorization back in August 2012, for 50 million shares through the end of 2017. The stock is yielding 2.6% and has a payout ratio of only 36% of the current-year EPS estimate. Analysts’ consensus EPS estimates for both 2013 and 2014 have been going up over the past three months.