I compiled a list of 5 stocks that have the track record, financial capacity, and management willpower to keep increasing their dividends over the next 5 years. This combination of dividend growth stocks and high dividend stocks span a variety of industries to craft a diversified portfolio of dividend stocks that are expected to produce an average yield of 4.8% in 5 years.
Altria (NYSE:MO): Chairman and CEO, Mike Szymanczyk, stated during the February CAGNY conference that:
"Since the Philip Morris International spinoff in 2008, Altria has increased its dividend five times for a total increase of 41%. Altria targets paying out approximately 80% of its adjusted diluted EPS, which excludes special items including charges related to tobacco and health judgments, in the form of dividends."
The dividend yield is hovering around 5.5%, driven by strong performance of the Marlboro brand across all tobacco categories, growth in its alcohol assets vis-à-vis SABMiller, and the prudent management of litigation risks. With brands like Marlboro, Virginia Slims, Copenhagen, Skoal, and Black & Mild, Altria holds ~50% market share in the U.S. cigarette category-- due largely to its Marlboro brand ~55% share of the smokeless tobacco category and a 28% share of the cigar category. The Company's renewed focus on product innovation and cost cutting will help increase profitability and --by proxy, the dividend-- moving forward.
The competitive landscape consists of Reynolds American (NYSE:RAI) and Lorillard (NYSE:LO). Reynolds American's better-known brands include Camel, Winston, Pall Mall, Kool, Grizzly, Kodiak, and Natural American Spirit. The company holds a 27% share of the cigarette market and a 32% share of the smokeless category. Lorillard is the third-largest tobacco company in the United States. The company's flagship brand is Newport, the best-selling menthol cigarette in the U.S. Its other well-known brands include Kent, True, Old Gold, and Maverick. Lorillard holds a 14% share of the cigarette category and a 36% share of the menthol cigarette sub-category.
Coca-Cola (NYSE:KO): Warren Buffett stalwart, Coca-Coca, is doing a good job of supporting growth by increasing market share through new products and marketing and is returning cash to shareholders via a significant share repurchase program. A number of restructuring initiatives are underway, including a global productivity initiative and expanded CCR integration efforts that will save an estimated $550-$650 million by 2015. Free cash flow of $6.6 billion in 2011 is down from the $7.3 billion in free cash flow due to capex but that is more than sufficient to support a growing dividend. In the fourth quarter, KO repurchased 13.5 million shares under its current 300 million share buyback authorization. KO has announced that it expects to repurchase between $2.5 billion and $3.0 billion of its common stock during 2012.
El Paso Pipeline Partners (NYSE:EPB): In January of this year, EPB's Board of Directors increased the quarterly cash distribution for the fourth quarter from $0.44 per unit to $0.50 per unit, representing a 14% increase y-o-y. Following that bit of positive news came a disappointing fourth quarter. EPB is structured as a master limited partnership (MLP) formed by its general partner and sponsor El Paso Corporation (EP), to own and operate natural gas transportation pipelines and storage assets. Distributions are expecting an increase in line with expectations. The revised distribution run-rate of $2.00 per unit is projected by analysts to grow at a 9% clip y-o-y over the new few years, which is above average for Energy MLPs.
Although fundamentally, El Paso Pipeline Partners remains well-positioned from a long-term distribution perspective, investors will need to keep an eye on the Kinder Morgan (NYSE:KMI) merger. Last October, EP announced a $38 billion merger with KMI. Since that point, EP has not dropped any additional assets down to EPB. In the past three quarters, over $3.5 billion of assets moved from EP to EPB. It is likely that KMI will continue to drop-down assets to EPB post-acquisition. Investors unwilling to wait for additional visibility may give up a great dividend play.
GlaxoSmithKline (NYSE:GSK): Over the past two years, GSK has spent almost $7 billion on dividend payments and currently boasts an attractive 5% dividend yield that is expected to increase over the coming years. 2012 could prove to be a promising year with 13 products in the pipeline. In the GSK July 2011 presentation, it laid out 15 Phase III assets which would read-out pivotal data from July '11 to the end of '12. Of these 15, 2 have failed (Otelixizumab for T1D, Tykerb for adjuvant Breast cancer as a monotherapy) and 13 projects remain. The potential "blockbusters" are Relovair for asthma, Zephyr for chronic obstructive pulmonary disease (COPD), and Integrase for HIV. Competitor Pfizer (NYSE:PFE) has a 4% dividend yield, Sanofi (NASDAQ:SNY) has a 4.5% dividend yield, Merck (NYSE:MRK) has a 4.4% dividend yield, and Novartis (NYSE:NVS) has a 4.5% dividend yield.
Microsoft (NASDAQ:MSFT): MSFT stock has been rallying, in part due to the anticipation ahead of Windows 8. JPMorgan analysts suggest that "the past six major Windows releases (Windows 95, Windows 98, Windows 2000, Windows XP, Windows Vista, and Windows 7) have generally been preceded by fairly sharp rises in MSFT stock during the 12 months leading up to General Availability." Shifting focus to the dividend, MSFT current has an annual dividend yield of 2.5%, whereas the average dividend paying stock in the Nasdaq 100 yields 1.9%. In September 2011, MSFT increased its dividend by 25% from $0.16 to $0.20 and given the $24.6 billion of free cash free available to shareholders, there is room for that dividend to grow.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.