With 2016 now in the books, investors can now look ahead for 2017. Market shifts are already underway, and the year’s economic waters remain uncharted as we look to the potential effects of the new administration. Most market analysts agree that 2017 will be another positive year for growth, but, as is typically the case, new developments often create new pitfalls and potential volatility for investors. Yet, we feel that prudent, high-quality strategies are paramount when looking ahead. To that end, the following represents five of the top stocks poised for dividend growth, according our DIVCON® methodology. Using dividend growth potential as an indicator for future stock price growth, DIVCON makes an in-depth quantitative analysis to assess the likelihood that a company will grow or cut its dividend within the next twelve months, helping to uncover what we feel are quality large-cap names as a part of a dividend growth investment strategy.
Why Dividends are Important
Dividend growth investing offers a compelling and powerful investment strategy capable of providing both capital appreciation potential and an income stream, a result even more important in today’s interest rate environment. Companies that are able to grow their dividends have historically outperformed the rest of the market, and typically with significantly less volatility. As illustrated in the following chart, dividends provide a naturally stabilizing element of total return as a steady income stream reduces the longer-term impact of price movements, and dividend growth also provides a natural hedge against rising prices.
*Data from 1/1/72 – 12/31/16 Source: 2016 Ned Davis Research, Inc. and Reality Shares.
Our DIVCON Methodology
DIVCON uses a forward-looking analysis to predict future dividend growth by forecasting and ranking a company’s ability to increase or decrease their future dividends. By evaluating each firm based on seven quantitative factors, Reality Shares gives each company a rank of 1 to 5, with 5 having the highest probability of an increase in a company’s dividend within the next 12 months. DIVCON analysis also helps to avoid companies and sectors of potentially low fundamental quality despite their higher yields.
- Southwest Airlines, Inc. (LUV) - DIVCON 5
At the top of our list, is Southwest Airlines, Inc. With our highest score of DIVCON 5, $LUV shows great potential for increasing its dividend this year, which can drive price growth potential as well. Last quarter, the regional airliner rallied strongly, growing 28.4% to end the year, according internal Reality Shares research. While its current dividend yield is lower than the yields of other sectors, Southwest has a prolific track record of dividends, boasting a dividend increase every year since 2011. The stock’s price growth has also shown strong rallies each year, which begin after its first dividend increase in 2011. In fact, since 2011, Southwest has shown dividend growth change rates of 100%, and stock price return over 250%. In addition to its dividend record, the airliner also shows strong underlying fundamentals, achieving 5 year annualized earnings-per-share growth of 39.7%, and a 5-year annualized cash flow growth rate of 10%. Dividends, as a function of cash flow, earnings, and other factors, show room for continued growth for the airliner. The analyst consensus is a year of relative outperformance, with a median target price of $57, up 14% in the next 12 months. Southwest shows high-flying dividend and price growth potential given its track record and underlying DIVCON fundamentals.
- Nike, Inc. (NKE) – DIVCON 5
Apparel and footwear developer Nike also makes as our list as a top DIVCON stock for the year. Also at DIVCON 5, the Beaverton-based retailer may have a brighter future, with potential to grow its dividend, and continue to rally in the large-cap category. Though Nike declined during 2016, it could hint that the multination corporation is undervalued. With a 14% annual earnings growth rate (GAAP), Nike shows consistent growth. Additionally, Nike has increased its dividend every year since 2009 by at least 10%, also coinciding with similar price growth, excluding 2016. The trailing twelve-month payout ratio for the quarterly is 22.61%, showing that the company is not cutting too deeply into its cash flow to make the dividend payouts to investors. Since 2012, Nike has recorded consecutive years of growing revenue, growing earnings-per-share, and growing dividends per share. Financial Times analysts give Nike a median share price target of $61, rallying 13% in 2017.
- Cracker Barrel Old Country Store Inc. (CBRL) – DIVCON 5
While previously at DIVCON 4, Cracker Barrel, recently achieved a DIVCON 5 score, denoting a high likelihood to raise its dividend within the next 12 months. As of September, 2016, the rustic, country-style developer operated 640 restaurant-stores in 43 states, and rallied 32% in stock price growth for 2016. The DIVCON indicator reflects future dividend increases, which typically take place with increases in earnings and cash flow. Since 2014, $CBRL’s earnings-per-share growth (GAAP) has averaged just below 20%, with an annualized 5-year growth rate of 17%. Interestingly, the company also shows potential for dividend growth by looking at its increasing cash flow, and low dividend payout ratio. Currently, Cracker Barrel’s dividend payout ratio is 55%, while its 5 year annualized growth rate is 12.5%, revealing its room for further increases. Furthermore, consistent dividend increases befits the restaurant-store chain, with an annual increase every year, reaching $4.60 per share annually or a dividend yield of 2.89%. NASDAQ analysts have set a median 2017 price target at $170, a 7% rally.
- Prudential Financial Inc. (PRU) – DIVCON 5
The financial sector may be one of the strongest sectors for dividend growth this year. As we mentioned in our 2017 outlook, The Financials sector is expected to be one of the leaders of dividend-per-share growth rates over the next twelve months, with a forecasted growth rate of 12.2%. Specifically, Prudential Financial has strong fundamentals that contribute to its DIVCON 5 score, indicating high potential to increase its dividend in 2017. With exceedingly low interest rates, many financial stocks have had many fiscal challenges wince the financial crisis. In spite of rough patches in the financial sector, $PRU shows annualized earnings per share growth of 14%, with a 320% jump in earnings-per-share from 2014-2015. Prudential has also routinely increased its dividend. Growing its dividend at no less than 8% since 2009, the Insurance leader offers a higher dividend rate than many of its industry peers at $2.80 annually, with an annual dividend yield of 2.66%. With three scheduled interest rate increases, Prudential can potentially benefit and increase its dividend payout ratio, which is currently 27.24%, still low compared to other dividend payers.
- Home Depot (HD) – DIVCON 5
Home Depot is another top rated stock in our DIVCON system. Rated at DIVCON 5, the home improvement corporation shows potential to increase its $0.69 quarterly dividend between now and December. Home Depot has a current dividend yield of 2.07%, and an annualized 5 Year earnings per share growth rate of 22%. In true DIVCON 5 fashion, $HD has increased its dividend for eight consecutive years, with a 10 year dividend growth rate of 19.4%. Even after a number of dividend hikes, Home Depot’s dividend payout ratio is still only 43%, showing its dividend can be built upon with any stress. In 2009, the stock price was near $35. Since then, the stock has climbed over 280% to $134, all coinciding with its dividend increases. The DIVCON rating for Home Depot reveals its positive dividend growth potential, and whispers price growth potential. Overall, the 26 analysts offering 12-month price forecasts for Home Depot have a median target price of $148.50, up 9% for 2017.
An Alternate Option to Yield Chasing
Prioritizing yield alone, without respect to underlying quality, can leave investors exposed to dangerous market forces—especially given a volatility interest rate market. It can be prudent for investors to look for yield in difficult market environments, but without the right strategy and tools, they can be exposed to unnecessary quality risk. Most available data on dividends is only backward looking, meaning the data does not provide a strong projection of future performance. Reality Shares developed DIVCON to address these concerns. With our family of unique ETFs, investors can strengthen their portfolios with strategies ranging from long-term growth, dynamic long-short strategies, and hedging for severe market volatility. All of the mentioned stocks are held in Reality Shares’ ETFs.
Learn more about DIVCON and how we harness the power of dividends at realityshares.com.
This article is commentary by an independent contributor. This material provides the observations and views of the person(s) who prepared the material. These observations and views may be different from, or inconsistent with, the views of Reality Shares or other persons within Reality Shares. The observations and views expressed in this material may change at any time without notice. This material is not intended to constitute an offer, or solicitation of an offer, to purchase or sell any security or financial instruments or to participate in any investment strategy. The securities and strategies referenced in this material are not intended as recommendations and may not be suitable for you.
*Past performance does not guarantee future results. Indexes are unmanaged and one cannot invest directly in an index. The universe of stocks is the 500 largest U.S. companies by market capitalization. All stocks were categorized by the following methodology for total return of each 12-month period since 1972 period ended Dec. 30, 2016. Dividend Cutters and Eliminators represents those stocks that have lowered or eliminated their dividend; Non-Dividend-Paying Stocks represents those companies that do not pay a dividend; Dividend Payers with No Change represents those dividend-paying stocks that have maintained their existing dividend rate; and Dividend Growers and Initiators represents those dividend-paying stocks that raised their existing dividend or initiated a new dividend. Performance does not represent any unit trust or strategy.
Eric Ervin is President and CEO of Reality Shares, Inc. This article expresses his opinions and may not necessarily represent the opinions of Reality Shares. This is not an offer for any investment product.
