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.

PNC Financial Services Group

One of the best sectors to find solid dividend-paying companies is financials, so it's fitting that we begin this week by taking a closer look at PNC Financial Services Group (NYSE: PNC), a diversified financial firm operating in the eastern half of the United States.

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Like most financial firms, low lending rates have been the biggest deterrent to PNC Financials' growth. Despite its mortgage banking business reaping the rewards of historically low lending rates via a resurgence in homebuying and refinancing, other aspects of its business that are interest-based have struggled. In recent quarters this has left PNC Financial with relatively stagnant growth prospects.


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But look beyond just the next couple of quarters and things brighten a bit, which could be just what income investors ordered.

For instance, the intermediate-to-long-term assumption is that lending rates will move higher toward their historic norm. Trying to time when this will happen is more than likely hopeless, but the consensus is that lending rates will rise once again, putting more money back into the coffers of big financial institutions. A series of rate hikes could have a big impact on PNC's profits beginning in the next couple of years, building upon the more than $7 in expected full-year EPS in 2016.

Inorganic growth is another possible avenue for PNC Financial Services to flex its muscles. In recent years, PNC has been spending heavily on its technology infrastructure in an effort to enhance the experience of its clients and push them toward mobile banking tools, which are substantially cheaper and more convenient for PNC. With spending on these tech upgrades slowing a bit, PNC may look to broaden its reach through M&A, which it did frequently during the mid-2000s. M&A could give PNC a quick path to build its assets under management, as well as provide an instant boost to profits.

Lastly, business diversity could really come into play. PNC has its fingers in a lot of different financial fields, including asset management, mortgage banking, retail banking, and institutional banking. While higher lending rates would typically be better for PNC Financial Services as a whole, certain operating segments, like mortgage banking, can act as a hedge when rates are falling. Coupled with cost-cutting, PNC can possible mitigate some of its downside in slower growth environments.

Currently paying out $2.20 annually, which is good enough for a 2.6% yield, it's not out of the question that PNC's dividend could double within a decade.

Tractor Supply Company

Some of the most promising dividend-paying companies are those that are just starting to flex their dividend muscles. Take Tractor Supply (NASDAQ: TSCO), a rural retail giant that's currently paying just a 1.1% yield. That may not seem like much, but the sky's the limit for its payout.


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The two biggest risks investors need to be aware of with a company like Tractor Supply are weather- and economy-based. The products Tractor Supply sells, such as riding lawnmowers, tillers, and other recreational equipment, can be affected by the weather. An unseasonably cool spring kept a lid on Tractor Supply's comparable-store sales in the second-quarter, pushing them lower by 1.9%. Secondly, the company relies on a growing U.S. economy to drive sales. Tractor Supply retails some large-ticket items, so a slowing economy, or one in recession, could cause the consumer to pull back on spending.

Despite these two concerns, there are a number of reasons to believe that, even after a decade-long move higher, Tractor Supply has plenty left in the tank.

To begin with, I don't think it would be prudent for investors to run for cover solely because the weather was uncooperative this spring. Weather patterns will vacillate from time to time, but Tractor Supply has an experienced management team and diverse enough product line to take advantage of all seasons. Over the long run I'd suggest we're more liable to see weather patterns normalize, which would be a stabilizing force for the company's profitability.

Reinvestment opportunities are another bright spot for Tractor Supply. The company has been aggressively opening new locations, moving from 1,001 stores at the end of 2010 to an expected 1,588 to 1,593 stores by the end of 2016. Over that timespan its net income is expected to have nearly tripled. Tractor Supply would ultimately like to have 2,500 stores in the United States. It's also working with a brand-new customer loyalty program that could further increase loyalty and foot traffic, and looking at ways to improve its supply chain to reduce costs and boost margins.

Finally, investors should understand that livestock & pet supplies are really the bread and butter of this company. While it does retail hardware and agricultural equipment, its livestock and pet operations comprised 44% of its revenue in 2015. Americans are more attached than ever to their companion pets, and the need for livestock as food remains strong, meaning the core growth driver for Tractor Supply is firmly intact.

The company's current payout of $0.96 annually could easily double, in my view, with $5+ in EPS forecast by fiscal 2019.

Intuit

Similar to Tractor Supply, financial management solutions provider Intuit (NASDAQ: INTU) is another currently below-average dividend payer that income investors shouldn't overlook.

Investors that choose to place their money behind Intuit need to know its biggest risk, which is namely that it's highly tied to its TurboTax online software. Being so reliant on TurboTax, and the three months leading up to Tax Day, means Intuit's revenue and profits are very lumpy. It can also lead to Wall Street analysts having a difficult time figuring out how much Intuit is going to earn in its prime one or two quarters. Long story short, Intuit investors should be prepared for some earnings-based volatility and profit lumpiness.


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However, I'd contend that this is hardly anything to be concerned about. If anything, Intuit has been knocking it out of the ballpark with its TurboTax online software and making its case to investors as a strong long-term buy-and-hold type stock. According to the company's fiscal third-quarter filing, its do-it-yourself TurboTax market share improved to 65%, with the company announcing that it was taking market share from professional tax preparation services like H&R Block, as well as discount online filing alternatives such as Blucora'sTaxAct.

What's driving this growth? Intuit's been focusing on millennials by dangling the hook to file 1040EZ and 1040A forms at the federal and state levels for free. These offers would be for taxpayers with extremely simple tax situations, such as those with a W-2 and nothing more. Intuit is dangling the carrot, known as Absolute Zero, with younger taxpayers in an effort to establish rapport and loyalty that'll keep millennials with the company when their finances become more complicated and cost substantially more to prepare. Needless to say, TurboTax's 2016 price strategy was extremely competitive with TaxAct.

In addition to the overwhelming success of TurboTax, the company's QuickBooks online subscribers continue to tick higher. The number of total paid subscribers hit nearly 1.4 million by the end of April, which is a signal that small businesses may be growing at a stronger pace than the economy might be indicating.

Intuit is currently paying $1.20 a year, which works out to a 1.1% yield. However, it's on track for $4.34 in EPS in 2017, and could deliver very high single-digit sales growth throughout the remainder of the decade. A doubling of Intuit's dividend appears likely if TurboTax retains or grows its do-it-yourself market share.

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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.

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