Dividend Stocks That Can Afford To Double Their Yields

Includes: NOC, RTN
by: Dividendinvestr

US Government Treasuries yield so little these days. The 10-year Treasury bonds yield only 2% per year. The Fed's expansionary monetary policy is very likely to drive the US inflation rate to above 2% in the next ten years. Therefore, bond investors actually lose purchasing power by investing in 10-year Treasury bonds. In fact, many investors have already noticed this and have switched to investing in stocks with high dividend yields. As a result, high dividend stocks started to trade at 14-15 times their earnings. This probably means that these stocks will return high dividends to investors, but they won't deliver much in terms of capital gains. We recommend younger investors focus on inexpensive stocks that have room to increase their dividends.

In this article, we are going to take a closer look at a few dividend stocks that can afford to double dividend payments. These stocks have decent dividend yields and low payout ratios. They also have impressive records of increasing their dividend payouts over the past few years.

Northrop Grumman Corporation (NYSE:NOC): NOC has a decent dividend yield of 3.35%. Although its yield is not extremely high, we think it is a good stock for young investors who do not need the dividend payments immediately. NOC has a good record of growing earnings. For the fourth quarter of 2011, the company reported net income of $548 million, or $2.09 per share, up from $376 million, or $1.03 per share, for the same quarter in 2010. In the next couple of years, NOC's EPS is also expected to grow at an average of 5%. Additionally, NOC has a payout ratio of below 30%. This means that NOC is very likely to increase its dividends over the next few years. In fact, the company has been raising its dividend payouts for 8 consecutive years. It recently increased its quarterly dividends by 6.4% to $0.50 per share. Last but not least, NOC has attractive valuation levels. Its current P/E ratio is 8.02, while its peers, Boeing Co (NYSE:BA), General Dynamics Corp (NYSE:GD), and Lockheed Martin Corporation (NYSE:LMT), all have P/E ratios of higher than 10.

Raytheon Co (NYSE:RTN): RTN also has a decent dividend yield of 3.42%. We expect the company to increase its dividend payouts in the next couple of years. The stock has a low payout ratio, growing earnings, and an impressive record of increasing dividends. For the 13 weeks ending December 31, 2011, RTN reported net income of $543 million, up 18.3%, when compared with the same period in 2010. The company also improved its EPS by 16.2% to $1.58 per share. We think RTN will continue to grow in the future. In fact, analysts expect the company's EPS to grow at 8.3% annually over the next five years. Similar to NOC, RTN has also been increasing its dividend payouts for 7 consecutive years. Last year, it increased its quarterly dividend from $0.375 per share to $0.43 per share. We think RTN is able to increase its dividend payouts over a long period of time, as it has a low payout ratio of 32.6% and a low P/E ratio of 9.52.

A few other dividend stocks with low payout ratios include CA Technologies (NASDAQ:CA), Intel Corporation (NASDAQ:INTC), and International Paper Co (NYSE:IP). These stocks have dividend yields of between 3-4%. They might not be good options for investors who want to get high dividends immediately. However, high dividend stocks are trading at a premium compared to their historical valuation multiples. Investors would be better off by investing in dividend growth stocks that are trading at 20-30% discounts.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.