Most people are chasing big dividend payers right now in this “3% world” we live in. Meanwhile, a small group of “hidden yield” stocks are quietly handing smart investors growing income streams PLUS annual returns of 12%, 17.3%, or more.
Let’s talk about how to find these stocks, and bank 12% returns or better every single year, by following a simple two-step formula.
See, everyone wants dividend stocks with good current yields. It’s easy to scan a newspaper or financial website and pick out the stocks that are paying 3%, 4%, 8% or whatever number you might consider “good.”
Yet that’s NOT the right way to pick dividend stocks.
You have to do more work to figure out if those yields are actually supported by the company’s cash flows, earnings power, long-term business prospects, etc. You have to sift through the same company’s history to determine how long it’s been paying those dividends. How consistently it’s been paying those dividends. And especially if it’s been regularly increasing its dividend payments.
The best time to buy a dividend grower is anytime. But we can tip the odds in our favor even further when we buy at moments like these – when the share price is due to “catch up” to the dividend.
Which brings me to step 1 of our 12% return formula…
Step 1: Buy Before Dividend Hikes
The “efficient market” is always slow to adjust to higher dividend levels. Folks who scan the papers are looking at trailing yields. They’re not considering next month’s payout increase, which is likely not yet priced into the stock quote.
Which means we should start our search for 12% by considering companies set to hike in the next month or two.
Here are nine firm’s poised to give their investors a payout raise in June.
Step 2: Review Next Month’s Dividend Hikes
Every dividend that eventually “accelerates” begins with a simple payout hike. We’ll talk about purchase timing in a moment. First, let’s review the seven stocks most likely to raise their dividends next month.
Discover Financial Services (DFS)
Dividend Yield: 1.8%
Financial stocks aren’t necessarily the most generous of dividend payers, with many of them shelling out in the 1%-2% area. Such is the case with credit card purveyor Discover Financial Services (DFS), which doesn’t even clear the 2% bar.
To its credit, DFS has pumped up its dividend significantly over the past few years, turning a 20-cent payout in 2014 into today’s 35-cent offering – a 75% increase.
To its detriment, the company has done so amid a roughly 15% contraction in earnings over roughly the same time.
Discover’s (DFS) Earnings Arsenal Is Waning
Still, the company did report a nice third quarter in April that included a 27% bump to the bottom line.
Expect Discover’s next dividend increase to come sometime in mid-July.
JM Smucker (SJM)
Dividend Yield: 2.9%
Jam master JM Smucker (SJM) is having itself a trying 2018, off double digits less than halfway through the year. That comes despite a beat on both the top and bottom lines back in February – the company’s $2.50 in earnings topped expectations by 37 cents, while revenues of $1.9 billion just slid above the $1.89 bill mark. Of particular interest was a gain in cash from operating activities, from $419.5 million to $469.0 million.
Perhaps investors aren’t pleased with guidance, which has net sales coming in between flat and down slightly for the year.
Investors will be hoping for a pick-me-up in the form of a dividend increase announced sometime in mid-July. SJM has lifted its dividend by almost 35% over the past five years, and still has ammunition enough to keep perking up the payout.
Dividend Yield: 3.4%
Kellogg (K) might command a horde of popular brands including Frosted Flakes, Froot Loops, Rice Krispies, Pringles, Pop-Tarts, Eggo, Kashi, Morningstar Farms and more. But it doesn’t command much respect among Wall Streeters – nor has it for some time. The stock has essentially been dead money for the past five years, and it has posted a 5% loss this year versus a roughly flat market.
That’s despite a significant bump since its first-quarter report in early May. At the time, the company reported a 69% jump in earnings as well as top- and bottom-line beats, thanks in part to strength in its frozen-foods unit.
Kellogg leaves much to be desired, not just on a share-appreciation basis, but also in the dividend-growth arena. The company’s payout expansion has slowed to a crawl, ranging between about 2% and 4% annually for the past several years.
Kellogg’s (K) Dividend Growth Is Flattening Out
Education Realty Trust (EDR)
Dividend Yield: 4.1%
Education Realty Trust (EDR) is a niche real estate investment trust (REIT) that specializes in collegiate housing, serving 79 communities across 25 states. Some of its most recent projects have been focused on Pennsylvania’s Lehigh University, as well as Mississippi State University.
This has been a roller-coaster stock for several years, including an up-and-down 2018 that has EDR sitting on fractional losses for the year-to-date. That hasn’t been helped much by a somewhat lackluster quarter for the period ended in March – the company’s funds from operation (FFO) declined 5% year-over-year on a 1.5% drop in same-community net operating income.
Also disappointing has been the dividend growth in this real estate name. The payout has improved by a modest 18% since 2014, with only penny-per-share hikes since 2015. Investors certainly will want to see better in mid-July, when the company typically announces its annual improvement.
National Retail Properties (NNN)
Dividend Yield: 4.6%
National Retail Properties (NNN) is a so-called “triple-net lease” REIT that boasts 2,800 properties across 48 states and 37 industries. It’s called a “triple-net” lease because when it leases properties, it puts the triple onus of taxes, insurance and maintenance on the tenant, too. So while the REIT charges less overall (because it’s not covering those expenses), it’s a far more predictable revenue model because there’s no guesswork as to what taxes will be in a given year, or what building issues will need to be addressed.
Like many retail REITs, National Retail Properties has been on the slide for a couple of years as the industry suffers the wrath of an ever-encroaching Amazon.com (AMZN) as well as other e-commerce headwinds. That said, the damage hasn’t been too bad simply because so many of NNN’s tenants aren’t direct competitors with Amazon. Consider that top tenants at the moment include companies such as 7-Eleven, Mister Car Wash and LA Fitness. As a result, funds from operation have actually been improving for years.
Dividend growth hasn’t exactly been explosive, however. The company’s payout has advanced by just 17% since 2014. And there’s no reason to expect anything different in mid-July, when the company is expected to deliver its 29th consecutive annual increase.
National Retail Properties (NNN) Is Making Money. Now It Needs to Give More Back.
Duke Energy (DUK)
Dividend Yield: 4.9%
What list of dividend growth stocks would be complete without a utility stock?
Duke Energy (DUK) is a Charlotte, North Carolina-based electric utility that serves roughly 7.6 million customers across 95,000 square miles of service area, and owns 49,500 megawatts of generating capacity.
This is one of the steadier dividends in the game, with Duke doling out a regular paycheck to investors for 92 consecutive years. And while it doesn’t sport a particularly long dividend growth history compared to the likes of Southern Company (SO), it still has more than a decade under its belt and has improved its payout by about 14% since 2014. The next payout hike should come sometime in the first couple weeks of July.
The yield also is getting help from a 10% year-to-date decline – more than twice as worse as the utility sector as a whole.
Enterprise Products Partners LP (EPD)
Distribution Yield: 5.9%
Energy master limited partnership (MLP) Enterprise Products Partners LP (EPD) has built an impressive income resume that includes 55 consecutive quarterly distribution increases. And that streak should extend to 56 consecutive quarters sometime in the first full week of July.
It’s likely to be a token increase, mind you, since it makes four such improvements in any given year. It also doesn’t add up a ton – the company’s distribution has inflated by just 22% since the start of 2014.
EPD is one of the largest energy partnerships in the world, boasting roughly 50,000 miles of natural gas, NGL, crude oil, refined products and petrochemical pipelines, not to mention storage facilities, processing plants and other assets.
It’s also no slouch, producing record net income, gross operating margin and adjusted EBITDA during its most recently reported quarter.
Step 3: Earn 12% Annual Returns For Life!
Robust dividend growth separates the winners from the losers.
And I’m not just talking about the stocks.
Low dividend growth goes hand-in-hand with slow and no growth – and even eventual decay. Hitch your wagon to the supposedly “safe” blue chips that most financial pundits shill for, and you’ll quickly be looking for part-time work a few years into your retirement.