With income investors seeking dividend stocks, many high yield stocks have been priced too high in the markets. One alternative is to look at stocks for growth and income. These stocks already pay a dividend but they will also raise their dividends in future years. Many of these stocks will potentially double their dividends in the next five years based on future company growth. To double a dividend in 5 years using the rule of 72, a company must average an annual dividend growth rate at around 15%. This article identifies 12 consumer stocks that are on track for a dividend double in the next five years (see table below).
PetSmart (PETM) is a multichannel retailer of pet food, supplies, and services in the United States. The company operates 1,150 stores with an average size of 23,000 square feet. PETM appears well positioned for market share gains in the coming years, even with a leading 12% of the $48 billion U.S. pet supply market. With unrivaled product diversity and unique service offerings, the firm holds several advantages over its rivals.
Analysts are forecasting a forward fiscal-year price/earnings of 17 times, an EV/EBITDA of 6.8 times, and a free cash flow yield of more than 8%. This assumes mid-single-digit revenue growth in 2011, driven by mid-single-digit comparable-store sales growth and around 45 net new store openings plus an additional 8-10 PetsHotel locations. Over time, mid-single-digit revenue growth trends are sustainable through low-single-digit comparable-store sales growth and about 40 net new store openings each year. PETM has a current yield of 1.03% with a 5-year dividend growth rate of 36.08%. In 2009, PETM paid annual dividends of %0.26 per share compared to $0.53 in 2011. As the economy and consumer spending improves in the coming years, the dividend should double within the next 5 years.
As one of the leading restaurant operators in China and the U.S., Yum Brands (YUM) has developed a narrow economic moat through its considerable leverage over suppliers and scale advantages. China gets much of the focus as the company's largest operating profit contributor, but emerging economies such as India, Indonesia, Malaysia, Vietnam, the Philippines, and several African markets will become increasingly vital drivers of long-term free cash flow.
Analysts anticipate average revenue growth of about 7.5% over the next 10 years. As China and other emergent markets become a larger proportion of the revenue mix and the firm continues refranchising efforts in the U.S., operating margins are expected to improve from 15.1% in 2011 to about 19% in 2020. In January 2007, YUM paid a quarterly dividend of $0.075 per share while the October 2011 dividend paid was $0.285, nearly 4 times greater. YUM has a current yield of 1.82% with a 5-year dividend growth rate of 30.6%.
McDonald's (MCD) maintains the leading market position in virtually every country in which it operates, and global expansion opportunities still exist. McDonald's is moving into Latin American opportunities following the initial public offering of its largest franchisee in the region, Arcos Dorados. McDonald's produces stable cash flow, even in challenging economic times, because of long-term franchisee royalty and rent payments. The firm owned 45% of the land and about 70% of the buildings for its restaurants at year-end 2010. McDonald's has a 30-year-plus history of paying cash dividends and repurchasing shares, including $5.1 billion returned to shareholders in 2010. In 2008, MCD paid dividends of $0.375 per share but this rate was $0.70 in December 2011. MCD has a current yield of 2.76% with a 5-year dividend growth rate of 22.8%.
TJX Companies (TJX) is the nation's largest off-price retailer of brand-name apparel and home fashions. TJX offers family apparel through its T.J. Maxx, Marshalls, Winners, and T.K. Maxx chains and home fashions through its HomeGoods and HomeSense stores. TJX operates about 3,000 stores in the United States, Canada, United Kingdom, Germany, and Ireland. TJX is in excellent financial health. The retailer has $774 million in long-term debt on its balance sheet with a debt/capital ratio of 0.20 and adjusted debt/EBITDAR of 2.5. Even when considering operating leases, EBITDAR covers interest expense by 3.6 times. TJX is able to turn roughly 5% of revenue into free cash flow, suggesting it can comfortably support its debt burden while paying a dividend and buying back shares. TJX will maintain a dividend payout ratio in the high teens to 20s and will proceed with its plan to repurchase shares in the future. TJX has a current yield of 1.14% with a 5-year dividend growth rate of 22.1%.
As shown in the table below, there are 8 additional stocks with 5-year dividend growth rates above 15%. Each of these stocks may potentially double their dividend in 5 years. These stocks include:
Fred's Inc. (FRED) operates deep-discount general merchandise stores that primarily serve low-income consumers in small, rural communities. The stores carry a wide variety of brand-name and private-label basic merchandise, including electronics, apparel, groceries, and household supplies, along with seasonal and closeout items. Approximately 280 of its stores also feature a full-service pharmacy. Fred's operates more than 660 stores, mainly in the southeastern United States. FRED has an annual dividend yield of 1.36%, a 5-year dividend growth rate of 20.11% and dividend growth of 25% in the last year.
Hasbro Inc. (HAS) manufactures and markets a broad range of children's toys. These include classic toy lines such as G.I. Joe, Play-Doh, Tonka toys, Nerf balls, and Weebles. Hasbro also markets a variety of board games under its Milton Bradley and Parker Brothers brands, including such favorites as Monopoly, Trivial Pursuit, and Magic: The Gathering. Hasbro's relationship with Disney also allows it to produce licensed Disney products. Hasbro has an annual dividend yield of 3.63%, a 5-year dividend growth rate of 20.11% and dividend growth of 20% in the last year.
Target Corp (TGT) is one of the largest retailers in North America, with about 1,800 units. Target large-format stores offer general merchandise and now a full assortment of food products. The company is set to enter Canada, but a vast majority of stores will still operate in the United States. Target sells roughly 20% of general merchandise under private label. TGT has an annual dividend yield of 2.41%, a 5-year dividend growth rate of 20.11% and dividend growth of 20% in the last year.
Tim Hortons (THI) is the largest quick-service restaurant chain in Canada based on 2010 systemwide sales of CAD 5.6 billion. There are more than 3,100 Tim Hortons in Canada, 99% of which are franchised-operated. In the U.S., the firm has more than 600 units primarily in the Northeast and Midwest. Its menu features premium-blend coffee and other beverages, as well as baked goods such as doughnuts, bagels, muffins, and pastries. THI has an annual dividend yield of 1.37%, a 5-year dividend growth rate of 19.42 and dividend growth of 30.77% in the last year.
Finish Line (FINL) is one of the nation's largest retailers of brand-name athletic footwear and apparel, with roughly 700 stores primarily in mall locations across the country. In 2009, the company sold its underperforming Man Alive chain, which specializes in urban-inspired fashion apparel. FINL has an annual dividend yield of 1.22%, a 5-year dividend growth rate of 19.14% and dividend growth of 50% in the last year.
Men's Wearhouse (MW) is an off-price retailer of men's tailored clothing. It operates over 700 stores in the United States and Canada. Targeting middle and upper income men age 24-54, the company's stores carry conservative designer, brand name and private label merchandise, including suits, sport coats, slacks, dress shirts, shoes, and accessories. The company also operates over 70 K&G warehouses which cater to more price sensitive consumers. MW has an annual dividend yield of 1.37%, a 5-year dividend growth rate of 19.14% and dividend growth of 33.3% in the last year.
Meredith Corp (MDP) is a diversified media firm. Most of the national segment is magazine publishing, along with its integrated marketing business. The firm publishes more than 25 magazines, including Better Homes and Gardens, Family Circle, Ladies' Home Journal, and Parents. Its local segment represents its broadcast television segment, with 12 network-affiliated stations, including CBS, Fox, MyNetworkTV, and NBC. Its largest markets include Atlanta, Las Vegas, and Portland. MDP has an annual dividend yield of 4.85%, a 5-year dividend growth rate of 19.04% and dividend growth of 66.3% in the last year.
Williams-Sonoma Inc. (WSM) is a leader in the $120 billion home furnishings category. Namesake Williams-Sonoma (260 stores) offers high-end cooking essentials, while Pottery Barn (193) provides casual home accessories. Brand extensions include Pottery Barn Kids (85) and PBteen (direct only), while West Elm (36) is an emerging concept for young professionals. WSM has an annual dividend yield of 2.52%, a 5-year dividend growth rate of 17.08% and dividend growth of 46.67% in the last year.