5 Income Generating Stocks With Strong Future Growth Prospects

Includes: DRI, KMI, LMT, MXIM, NVS
by: Investment Underground

By Larry Gellar

I have identified five stocks that can help investors bring in additional income for years to come. While Darden (NYSE:DRI), Maxim (NASDAQ:MXIM) and Novartis (NYSE:NVS) have somewhat more volatile cash flows than Lockheed Martin (NYSE:LMT) and Kinder Morgan (NYSE:KMI), all five look to be valuable additions to a portfolio. I selected these five stocks based on their future growth prospects. Whether engaging in new innovations, making strategic changes or picking up highly valuable contracts, these five companies are putting themselves in positions for positive growth right now.

Maxim Integrated Products is a semiconductor manufacturer that offers a dividend yield of 3.2%. The company recently reported earnings, which were slightly better than analysts were expecting on a per-share basis. Revenue was down significantly compared to the same quarter a year ago, however, due to weakness in the company's Industrial and Communications segments. On the other hand, Maxim's technology is impressive, and innovation should help the company continue its growth in the U.S. and China. In fact, I could definitely see Maxim increase its dividends once trends in the computing industry start to go the company's way again.

Maxim also stands to benefit from increased usage of smart phones and tablets because of the hardware it makes for those items. Furthermore, a look at the statement of cash flows reveals Maxim's superior financial position. With nearly $700 million of free cash flow in fiscal year 2011, the company was able to make acquisitions and buy back stock. Future conditions may allow for that free cash flow to go toward increased dividends. Meanwhile, Maxim just announced an exciting product in the automotive arena. The MAX16919 and MAX16969 will allow drivers to safely recharge their USB devices using short-to-battery and short-to-ground protections. Based on the above information, I believe this stock is positioned to provide solid income to investors in the coming quarters.

Novartis AG is a drug manufacturer that offers a dividend yield of 3.6%. The company recently reported net income of $1.21 billion, which was significantly lower than its profit from a year ago at this time due to unusually high costs. CEO Joseph Jimenez said, "We experienced some disappointments in the fourth quarter, with Tekturna/Rasilez and with the need to improve our quality standards at some manufacturing sites," although revenue did increase on a year-over-year basis. On the other hand, failed drug trials and job cuts required the company to take some big one-time charges.

Due to Novartis' mixed results, I predict that the company's dividend will remain unchanged for a little while. Such an event would work for investors who could continue to reap the 3.6% dividend yield. As evidenced by the statement of cash flows, Novartis has been doing quite nicely. With nearly $12 billion of operating cash inflow in fiscal year 2011, Novartis was able to distribute nearly $9 billion of that to shareholders through buybacks and dividends. I predict Vaccines and Diagnostics will keep up its strong growth going forward, and the Alcon and Sandoz subsidiaries also figure to be lucrative. Additionally, Novartis is having success in emerging markets like Brazil, China and Russia, which investors can read more about in the earnings transcript. I strongly believe Novartis will be able to continue its strong dividend growth, which will pay off greatly for income investors looking for a consistent profit.

Lockheed Martin is an aerospace/defense company that offers a dividend yield of 4.7%. One recent headline for the stock has been a five-year contract worth up to $94 million. Indeed, Lockheed Martin will provide technical support such as exercise facilitation to Kirtland Air Force Base's Distributed Mission Operations Center. Another piece of news for the company is a six-year contract worth $66 million to get the new U.S. Army Medical Research Institute of Infectious Diseases Replacement Laboratory up and running. This comes from the U.S. Army Engineering and Support Center, so it could help Lockheed Martin improve an already terrific relationship with the U.S.'s military.

Deals like these should help Lockheed Martin continue to increase its dividends. As seen on the statement of cash flows, the company had over $3.2 billion of free cash flow in 2011, and much of that went to buying back stock. As the company's financial position becomes more cemented, those buybacks should turn into more dividends. Meanwhile, another exciting development for Lockheed Martin is its new partnership with Raytheon (NYSE:RTN). By teaming up, the two companies hope to be awarded a contract for SEWIP Block 3, which would improve the electronic attack capabilities of what the Navy is currently using. With the above mentioned deals and developments, I believe the company will produce solid dividend income for quite some time.

Kinder Morgan, Inc. is an operator of oil and gas pipelines that offers a dividend yield of 3.9%. The company recently announced that it would be invest about $140 million to expand its coal handling capabilities in the Gulf Coast. Additionally, a new deal with Arch Coal (NYSE:ACI) will allow Kinder Morgan to have a guaranteed customer for these new facilities. This cozy relationship between the two companies could strengthen even further because Jeff Armstrong, president of Kinder Morgan Terminals, said, "We are also extending existing long-term coal agreements with Arch at our upriver terminals (Cora, Cahokia and Kellogg) in Illinois."

Another piece of news for Kinder Morgan is its recent earnings report. Despite a solid increase in revenue, Kinder Morgan's earnings per limited partner unit were significantly below analyst expectations. On the other hand, there is reason to believe that Kinder Morgan could increase its dividends again in the near future. Specifically, Kinder Morgan figures to be prime beneficiary as natural gas shale plays become more popular. Additionally, Kinder Morgan's Terminals unit should see strong growth due to improving demand for export coal. Additionally, with nearly $700 million of free cash flow in the first three quarters of fiscal year of 2011, I believe Kinder Morgan is well positioned financially to continue its dividend growth and allow shareholders to profit greatly in the coming quarters.

Darden Restaurants, Inc. operates a variety of interesting restaurants such as Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze and Season 52. Darden was just named one of Fortune's 100 Best Companies To Work For, and the magazine called the company "a diversity champion."

Meanwhile, Darden's Olive Garden has been receiving attention from analysts. As described in that article, Goldman Sachs analyst Michael Kelter says that Olive Garden's revenues may improve based on a survey that was recently completed. Kelter also praised Olive Garden's promotions, advertising and an improved menu in the future. With over $300 million of free cash flow in fiscal year 2011, I wouldn't be surprised if Darden increased its dividends soon. Operating cash flows have admittedly been weaker in the six months after fiscal year 2011 ended, but I expect things to turn around due to this company's strong lineup of restaurants. Also, some of those weaker operating cash flows have been due to changes in working capital that won't necessarily keep happening. For these reasons, I believe Darden is in a strong position to increase its dividends, making it a great addition to the income investor's portfolio.

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