By Serkan Unal
Dividends have contributed about 42% of the long-term total returns of the S&P 500 Index, according to Standard & Poor's. Dividend growth has been a key driver of this substantial contribution. With corporate cash hoards at record highs, many corporations are returning increasing amounts of cash to shareholders in the forms of dividends and share buybacks. Investors should focus their attention to the stocks of companies that have the capacity to grow their dividends, sustainably and substantially, over extended periods of time.
Given that dividend growth stocks are most suitable for the periods of low or no economic growth, which matches the current macroeconomic conditions, dividend growth stocks should appeal to all investors. Here is a quick glance at four dividend stocks that have decided this month to raise their payouts by double digits. These stocks have indicators such as robust EPS growth, strong free cash flow generation and management's commitment to dividend increases, which suggest that the stocks can continue raising dividends at robust rates in the future. All selected stocks pay dividend yields equal to or higher than the average yield on the S&P 500 Index, which is 2.2%.
Seagate Technology Plc (STX) is a hard drives maker. Its management sees as the top priority an objective to return to shareholders more than 70% of its operating cash flow via shares repurchases and dividends. Seagate's dividend is yielding 5.0% on a low payout ratio of 20%. In December, the company raised its dividend by 18.8% relative to its previous quarterly payout. In fact, Seagate has raised dividends twice this year. Over the past five years, the company's dividends grew, on average, by 26% annually. The company's 5-year EPS CAGR is forecasted at 12.5%. The company's free cash flow yield is high at 27% and its ROE is superb at 112%. Despite the market's negative sentiment associated with a perception that Seagate Technology's business will suffer due to a secular decline in the PC market, the company is increasingly focusing on the high-margin enterprise market. Seagate has a forward P/E of 6.0x, a 43% discount to its industry, despite a run-up in prices of nearly 90% over the past 12 months. Greenlight Capital's David Einhorn has more than $514 million in this stock.
Amgen Inc. (AMGN) is biopharmaceutical giant with a dividend yield of 2.2% and a payout ratio of 34%. Its quarterly dividend, which was introduced in 2011, grew 68% since initiation. This month, the dividend boost was 31%. Analysts forecast the company's 5-year EPS CAGR will average 10.3% annually. Amgen's free cash flow yield is high at 7.2% and its ROE is 21%. In addition to boosting its dividend, the company also increased its share repurchase plan by $2 billion, which leaves $2.5 billion to be spent on stock buybacks by early 2014. Amgen recently acquired deCODE Genetics, a leader in human genetics, for $415 million. This deal should help the company position itself in the human genomics market. As regard for its valuation, Amgen is attractive on relative valuation as its forward P/E of 12.5x is lower than the stock's five-year average ratio of 14.2x. AQR Capital's Cliff Asness is a buyer of this stock.
Boeing Inc. (BA) is the aerospace giant that pays a dividend yielding 2.5% on a payout ratio of 34%. Over the past five years, the company's dividends grew, on average, by 4.7% annually. This month, the company boosted its dividend by 10%. Analysts forecast Boeing's EPS CAGR at 11.5% for the next five years, faster than its dividend growth and faster than long-term EPS growth rates of its main competitors. Boeing has a free cash flow yield of 5.6% and ROE of 64%. The company has some $3.6 billion authorized for share repurchases, and plans to use up to $2 billion in 2013. With a low dividend payout ratio and lagging its main competitors on the dividend yield, Boeing is likely to continue boosting dividends in the future at growth rates above historical averages. The company's trailing P/E of 14.8x is lower than its industry's ratio of 16.6x; however, Boeing is trading slightly above its industry based on the forward P/E of 15.3x. Fund manager Phill Gross (Adage Capital) is bullish about the stock.
Wisconsin Energy Corp. (WEC) is an electric and gas utility company. Its dividend yields 3.6% on a payout ratio of 56%. Over the past five years, its dividends grew, on average, by 19.1% per year. This month, WEC's dividend was hiked by 13%. The latest annual dividend increase will be its 10th in a row. The utility's 5-year average dividend growth is more than four times higher than that of its peer group. The company has some prospects for EPS expansion as its 5-year EPS CAGR is forecasted at 6.9% per year. Wisconsin Energy Corp. has generated a substantial free cash flow on a trailing-twelve-months basis, which puts its trailing free cash flow yield at 5.3%. Its ROE is 14%. Billionaires D. E. Shaw and Israel Englander established new positions in this stock in the third quarter.