Investments in stocks of companies that boost their dividends significantly and consistently allow investors to earn progressively higher income streams over time. High dividend growth stocks tend to outperform those stocks that bolster their dividends at low rates or keep their dividends unchanged. Investors should consider including in their income portfolios those stocks that have increased or plan to increase dividends at high rates.
Three dividend-paying stocks have just hiked their payouts by double-digit rates. These include Cisco Systems (CSCO), GameStop Corp. (GME), and AMCOL International Corporation (ACO). These three stocks have an average indicative yield of 3.6% and low dividend payout ratios between 38% and 43%. Here is an overview of these three dividend growth stocks:
The company is the networking giant that has paid a regular quarterly dividend since early 2011. Since then, the company's dividend has increased 133% to the current $0.14 a share. Over the past five years, Cisco has seen its EPS grow 5.6% per year. Its free cash flow per share increased at a rate of 7.8% per year over the same period. Analysts forecast that the company's EPS growth will average a higher 8.1% per year for the next five years. Last week, Cisco bolstered its dividend by a spectacular 75% for this year. Including the latest dividend hike, the stock is currently yielding 2.9% on a payout ratio of 38%. For reference, the company's main competitors, Alcatel-Lucent (ALU) and Juniper Networks (JNPR), do not pay any dividends, while Hewlett-Packard (HPQ) pays a dividend yield of 2.7%.
Cisco's expected robust EPS growth, low payout ratio, and ample free cash flow accumulation suggest that the company will be able to continue boosting its dividend in the future. In fact, even though the latest dividend hike makes Cisco the company with the highest dividend yield among the large-cap tech stocks, Cisco's promise to return at least 50% of its free cash flow to shareholders suggests that further dividend boosts could be expected in the future. Cisco is trading at $19.06 a share, up 19% over the past year. It is attractively valued, trading at a discount to its peer group and the company's own historical metrics. The stock is popular with value investors Jean-Marie Eveillard of First Eagle Investment Management and fund manager Donald Yacktman.
The company is the world's largest video game hardware and software retailer. It started paying a regular quarterly dividend earlier this year. The company has just boosted its quarterly payout by 66.7% to $0.25 a share. Over the past five years, the company's EPS grew at an average annual rate of 19.3%. Analysts expect its EPS growth to average 9.4% per year for the next five years.
GameStop Corp. accumulates high free cash flow, which totaled $3.3 per share in 2011. Over the past five years, the company's free cash flow increased at an average rate of 13.3% per year. Additionally, the company has been returning large amounts of cash to shareholders in the forms of dividends and share buybacks. In the second quarter alone, GameStop Corp. repurchased more than $136 million in stock, reducing its shares outstanding by about 9% in the past year. The company plans to return $2 billion to shareholders over the next four years via buybacks and dividends.
For reference, with a boosted dividend, GameStop Corp. will pay about $124 million in dividends for the next year. This suggests that the company could boost its dividend payout again in the future. However, there are some concerns that large stock buybacks are supporting EPS performance, thereby masking the underlying weakness in EPS growth. Despite the significant stock repurchases, the company's share prices are still down from levels reported a year ago.
Including the latest dividend hike, GameStop Corp. has an indicative yield of 5.4% and a payout ratio of 43%. The company's peer, Best Buy Co. (BBY), pays a dividend yield of 3.4%, while online retailer Amazon.com Inc. (AMZN) does not pay any dividends. GameStop Corp.'s stock is trading at a major discount to its historical metrics and to its peer group's valuation. The shares are changing hands at $18.57 a share, down 10.4% over the past year. Quant investor Cliff Asness reported owning as much as $70 million in the stock. Fund manager Chuck Royce of Royce & Associates held almost double that amount in the first quarter.
The company is a specialty minerals and technology products and services supplier for various industrial and consumer markets. It primarily produces bentonite, which is used in metalcasting, pet care, laundry care, and drilling industries. AMCOL has consistently paid dividends to its shareholders since 1937. Over the past five years, its EPS and dividends increased at average rates of 3.1% and 6.0% per year, respectively. Analysts forecast that the company's EPS growth will continue to average about 3% per year for the next five years.
Last week, the company bolstered its quarterly dividend by a higher-than-average rate of 11.1% to $0.2 per share. Including this dividend hike, AMCOL's indicative dividend yield is at 2.6%. Its payout ratio is 38%. The company's main rivals, Unimin Corporation and M-I L.L.C., are closely held. The stock is trading at a premium to its industry; however, it is currently priced at a discount to its own historical metrics. Value investor David Dreman initiated a small new position in this stock in the first quarter. (Note that the company has delayed reporting its latest quarterly results due to a need to restate the value of inventory in its environmental segment.)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.