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, but they're also 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.

U.S. Bancorp

Let's take a look at one of the most rock-steady money center banks in the United States, U.S. Bancorp .

U.S. Bancorp is an interesting case in that it avoided a lot of the huge losses that its larger peers suffered through during the Great Recession. The reason is that it was among a relatively small class of money center banks that chose not to participate in the risky derivatives market. Instead, U.S. Bancorp has traditionally focused on the bread and butter of banking activity -- i.e., growing loans and deposits, pushing consumers to cheaper mobile banking, and improving customer loyalty to create repeat business. It's also kept its exposure to mortgage loans to a relatively reasonable level.

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Recently, the Federal Reserve disclosed the results of its 2016 Comprehensive Capital Analysis and Review (CCAR), and not surprisingly, U.S. Bancorp's balance sheet and capital distribution plan passed with flying colors. Following the CCAR, the company announced a nearly 10% increase to its dividend to $0.28 per share and also added a $2.6 billion share repurchase program. Share repurchases reduce the number of shares outstanding and can have a positive impact on earnings per share and overall valuation.

Even with this dividend increase to $1.12 annually, I believe a move to $2.24 per year in payouts is possible by 2025 or earlier. At some point down the road I would anticipate that interest rates are going to normalize, which is going to allow U.S. Bancorp's net interest margin to expand. In the meantime, though, investors benefit from U.S. Bancorp's superior return on assets (1.32% in 2016's first quarter) and generally stable noninterest expenses.

Sporting a 2.8% yield, U.S. Bancorp certainly appears worth a look for dividend seekers.

Royal Caribbean Cruises

Another company that could make some serious waves with income investors in the coming years is cruise line Royal Caribbean Cruises .

The big concern with a company like Royal Caribbean is that its business is intricately tied with the health of the global economy. Royal Caribbean, and all cruise lines for that matter, prefers a robust growth environment where consumers are more willing to spend their discretionary funds. However, even with global growth in the U.S. and abroad a bit tamer than Royal Caribbean would like to see, there are a bounty of catalysts.


Harmony of the Seas, the world's largest cruise ship. Image source: Royal Caribbean.

The key catalyst has been the company's growth strategy, known as the "double-double." The double-double strategy involves doubling the company's EPS between 2014 and 2017, which it's on pace to do, as well as doubling down on its efforts to boost its return on invested capital (ROIC) to a double-digit percentage. Royal Caribbean is working its magic by expanding globally and providing ample upgrades to new and existing fleet. For example, the launch of the MS Quantum of the Seas, Royal Caribbean's next-generation cruise ship in 2014, made China and its superior growth rate, as well as burgeoning luxury markets, its home. With new ship amenities, a friendly and knowledgeable staff, and a strong brand name within the industry, Royal Caribbean's double-double strategy is on track.

Other factors could also benefit Royal Caribbean. Slower global growth prospects should also mean tame fuel costs, as well as the continuation of low lending rates in most developed countries around the globe. Low lending rates could encourage consumers to be more liberal with their spending since variable credit card rates are unlikely to rise any time soon.

Royal Caribbean is currently paying out $1.50 annually (a 2.2% yield), but Wall Street is targeting more than $8 in full-year EPS by 2018. This would imply that, assuming its ROIC continues to climb via its double-double strategy, dividend hikes could be in Royal Caribbean's future.

Royal Gold

By coincidence, the last company on this week's list is also "Royal," as in Royal Gold .

Most income investors don't give mining stocks much consideration, the reason being that mining costs can be lumpy, and metal prices can fluctuate, which can directly impact profitability and dividend payments. This, however, is far from the case with Royal Gold, a gold royalty stream operator.


Image source: Getty Images.

Royal Gold's business model is pretty simple. Instead of being involved with direct mine operations and management, it purchases royalty streams via long-term or life-of-mine contracts. Roughly 90% of its revenue is derived from gold, but it also received about 5% from copper and another 5% from silver and other byproduct metals during the third quarter. In return for these streams and royalties, Royal Gold forks over an upfront cash payment, or series of payments, that allow a mine operator to fund the expansion of an existing mine or the build-out of a new mine. Once more, Royal Gold benefits by purchasing the gold or other byproducts at far below market value, thus pocketing the difference between its contract price and the current spot price for gold.

Royal Gold is a veritable monster in the gold space, with dozens of royalty streams in its portfolio. What investors would like is that its portfolio is both geographically diverse and poised to grow. Canada, Chile, and the Dominican Republic comprised about 86% of its royalty and stream interest in Q3 2016, which means its exposure to Africa and possible labor disruptions is very minimal. Remember, Royal Gold is still dependent on its producers to deliver each quarter. Furthermore, production ramp-ups in existing portfolio properties could yield even more robust production results in 2017 and beyond.

With gold prices climbing on the heels of uncertain global growth, and lending rates expected to stay near their historic lows for the foreseeable future, Royal Gold's margin could be primed to expand. Its current annual payout of $0.92 (1.3% dividend yield) may not be for everyone, but I could see this payout doubling over the next decade due to its healthy margin.

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, 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.