3 Attractive Income Stocks Whose Dividends Could Double

By Markets Fool.com


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Dividend stocks can be the foundation of a great retirement portfolio. Not only do the payments put money in your pocket, which can help hedge against any dips in the stock market, they're usually a sign of a financially sound company. Dividends also give investors a painless opportunity to reinvest in a stock, thuscompounding gains over time.

However, not all income stocks live up to their full potential. Using the payout ratio -- i.e., the percentage of profits a company returns to its shareholders as dividends -- we can get a good bead on whether a company has room to increase its dividend. Ideally, we like to see healthy payout ratios between 50% and 75%. Here are three income stocks with payout ratios currently below 50% that could potentially double their dividends.

Comfort Systems
Wild weather got your head spinning? Start the week off with a company in the industrials sector whose dividend might look anemic now, but which has the potential to double, or even triple, over the next decade: Comfort Systems .

Comfort Systems is a contracted company that provides heating, ventilation and air conditioning (HVAC) services, including installation, repair, and maintenance, to a host of industries. One reason it's looking particularly attractive is the prospect that weaker-than-expected GDP growth in the U.S. and around the world could lead the Federal Reserve to temper its interest rate hikes and long-term lending rate targets. Low lending rates are conducive to business expansion, which means new construction opportunities and the chance for Comfort Systems to install or maintain HVAC systems. As long as lending rates remain low and access to capital is robust, Comfort Systems should benefit.


Image source: Comfort Systems.

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The proof has been in the pudding that low lending rates are boosting Comfort Systems' organic growth. Fourth-quarter revenue jumped to $383.8 million from $356.5 million in the prior-year period, adjusted EPS improved to $0.35 from $0.29, and free cash flow vaulted to $18.1 million from just $1.4 million.

Also helping this HVAC specialist is a series of acquisitions. In early February, Comfort announced the purchase of the ShoffnerKalthoff Family of businesses. Like most acquisitions, it's expected that there will be a couple of quarters where the deal adversely impacts Comfort Systems' bottom-line. However, after 12 to 18 months have passed, the deal is expected to be earnings accretive.

As it stands now, Comfort Systems is paying out $0.26 annually to its shareholders, which is good for a 0.9% yield. Yet the company is on pace to deliver forecasted EPS of $1.61 in fiscal 2016. If Comfort Systems can keep up mid-single-digit sales growth and keep its expenses under control, there's no reason to believe this dividend couldn't double or triple within a decade or less.

BankUnited
The banking industry is often another source of juicy dividends, which is why I'd suggest income investors give some credence to regional bank BankUnited .

BankUnited predominantly operates in Florida, although it does have commercial operations in New York. It's not your typical bank, either. In January BankUnited announced that it would be shutting down its mortgage loan origination business (which, to be fair, was already its smallest operating segment). BankUnited has pushed decisively into being a full-service bank dedicated to small businesses and other commercial entities. Eliminating non-core assets should help reduce expenses and keep it focused on its most profitable ventures.


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Another key component to BankUnited's success is its geographic position in Florida and New York, two states that have relatively little to do with energy loans. Compared to its many regional peers, BankUnited is sitting pretty with no signs of loan stress caused by falling energy and commodity prices. This helps remove a big cloud of uncertainty for BankUnited that tends to cloud much of the banking industry.

BankUnited's fiscal 2015 results also tell the story of a bank whose conservative lending habits are translating into solid results. For the full-year, total deposits increased by $3.4 billion to $16.9 billion and new loans and leases grew by $4.7 billion. All the while, non-performing loans totaled just 0.37%, which was down 29 basis points from Q3 2015. Book value also improved by better than 3% year-over-year.

Currently paying out $0.84 annually, BankUnited is yielding a very respectable 2.4%. Yet Wall Street anticipates that its EPS could surpass $3.50 on an annual basis by 2019. If this were to happen, it's quite possible that BankUnited could work to double its dividend over the course of the next decade.

HP
Lastly, I'd suggest income investors consider a somewhat controversial pick in the technology sector: HP .


Image source: HP

If the name sounds familiar, it's because this is one component of the now split-up Hewlett-Packard, which began trading as two separate entities in October. The reason HP split into HP and Hewlett-Packard Enterprise was to help unlock shareholder value and allow each business to more easily focus on its strengths. Hewlett-Packard Enterprise offers the best growth prospects as an IT and cloud-services company, whereas HP contains HP's slower-growth personal-computing, printing, and web services operations.

On the surface, Hewlett-Packard Enterprise might seem like the better bet, being tied to enterprise data center and cloud growth. But there's a big reason why income investors could really benefit from buying and holding HP for an extended period of time. Even though enterprise PC service and printing service revenue is expected to slowly be squeezed as time moves on, HP keeps gaining market share in these categories. Improved market share could help improve pricing power, but more importantly could help cut marketing costs, ultimately leading to an increase in margins.

HP is also priced very attractively, at just seven times forward earnings, and is generating substantial cash flow, which can help fund its dividend payment. The company is paying out an aggressive $0.50 per year, which is good enough for a 4.3% yield, well ahead of the S&P 500's average yield. As PC revenue slowly fades and HP's margins improve, it could be a smart idea for the company to boost its shareholder return strategy by boosting its dividend. With around $1.60-plus expected in EPS annually for the foreseeable future, a move to a $1 annual dividend isn't out of the question in my mind.

The article 3 Attractive Income Stocks Whose Dividends Could Double originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.