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 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 read on whether or not a company has room to increase its dividend. Payout ratios between 50% and 75% are ideal. Here are three income stocks with payout ratios currently below 50% that could potentially double dividend payments.


We'll begin the week by taking a brief look at one of the technology sector's juggernauts, Oracle (NYSE: ORCL).

Shares of Oracle have been a bit of a disappointment for investors since the start of 2014, with the company's share price essentially stagnant. The big issue for Oracle has been the ongoing transition away from hardware and static PC-based software toward solutions that support cloud-computing. This has involved increasing its research and development costs all while its de-emphasized business segments have weighed on its near-term growth prospects.

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However, there are two factors that could make Oracle an intriguing long-term buy candidate for income seekers.

Image source: Flickr user Steve Wilson.

First, Oracle is making solid progress with its razor-and-blade software-as-a-service cloud model. Total cloud revenue, which includes its SaaS model as well as its platform-as-a-service (PaaS) and infrastructure-as-a-service model, rose 59% year-over-year to $969 million. According to Oracle's CEO Mark Hurd, Oracle is the market leader in SaaS and PaaS sold based on revenue.

More importantly, gross margin rose in the company's cloud segment to 62%, with Oracle on pace to reach its long-term margin target of 80%. Remember, cloud customers tend to be very loyal since it's costly to switch platforms -- meaning the more customers Oracle can nab, the more predictable its growth and cash flow should be.

The second factor is Oracle's ability to use M&A to its advantage thanks to its incredible cash flow. For instance, in July Oracle announced the $9.3 billion acquisition of NetSuite (NYSE: N) to expand its cloud-based offerings. The deal will be immediately accretive to Oracle's bottom-line given NetSuite's recent quarterly sales growth, which has exceeded 30%. The move also follows Oracle's purchases of Opower and Textura in May, which are cloud companies that target the utility and construction industries, respectively.

Currently paying out $0.60 annually, yet on target for $3.83 in EPS by 2020 according to Wall Street, it's my opinion that Oracle's dividend looks likely to double within the next 5 to 10 years.

Becton Dickinson

Another company that dividend-seeking investors would be wise to pay attention to is Becton Dickinson (NYSE: BDX) in the medical device and life sciences space.

Perhaps the biggest knock against a company like Becton Dickinson is that the medical device industry is highly competitive, which has led to product pricing being somewhat commoditized. The rollout of the Affordable Care Act also did the industry no favors, with hospitals doing their best to hold off on spending given the uncertainties surrounding the ACA, and consumers putting off optional procedures.

The good news for Becton Dickinson is there are two key catalysts that favor its long-term growth.

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To begin with, the U.S. Census Bureau is forecasting that the elderly population in the U.S. will nearly double between 2012 and 2050 to 83.7 million. Older Americans typically require more frequent medical care, which means an increase in the use of diagnostic and preventative care medical devices. Though Becton Dickinson may be delivering low single-digit organic growth for the time being, its growth rate and pricing power have a real possibility to grow substantially once baby boomers reach their 70s and 80s.

Secondly, like Oracle, Becton Dickinson is also benefiting from M&A activity. Arguably the most transformative deal in its history was the 2014 announcement that it was acquiring CareFusion for $12.2 billion. The move pushed Becton Dickinson into the leading role in the medication management sector, and also increased its international exposure. Additionally, it led to cost synergies that should progressively improve Becton Dickinson's margins.

Though Becton Dickinson's current yield of 1.5% might not be much to look at, the $2.64 being paid out annually could double over the next decade, with more than $11 in EPS forecast by fiscal 2019.

Bed Bath & Beyond

Lastly, dividend investors would be smart to keep a close eye on Bed Bath & Beyond (NASDAQ: BBBY) in the retail space.

Without question, the biggest concern for Bed Bath & Beyond and its shareholders has been the ongoing push toward consumer convenience. What we've witnessed is the effect of "showrooming," whereby consumers try out products with bricks-and-mortar retailers and then purchase them online for a cheaper price. This has moved beyond the electronics sector and into more traditional retail segments, such the home goods offered at Bed Bath & Beyond.

Though its recent earnings results have been a bit disappointing, there are notable reasons to be excited about its prospects going forward.

Image source: Bed Bath & Beyond.

For starters, Bed Bath & Beyond is doing what it can to emphasize its direct-to-consumer sales. Despite a low single-digit decline in its bricks-and-mortar same-store sales in the second quarter, revenue from digital channels grew by more than 20% year-over-year. We saw a similar tactic from big-box electronics retailer Best Buy, and while it didn't work immediately, it eventually helped the company fight back against e-commerce giants. If executed correctly, Bed Bath & Beyond has an opportunity to negate its bricks-and-mortar sales declines with double-digit online sales growth.

Bed Bath & Beyond's conservative fiscal strategy is another reason investors should be excited about this company's future. With the exception of the $1.5 billion in debt the company took on to finance a share repurchase program, the company had $578 million in cash as of the latest quarter and a low debt-to-equity that allows for excellent financial flexibility. This implies that Bed Bath & Beyond has the capital needed to reinvest in its online business and make earnings accretive acquisitions as its management sees fit.

Currently paying out $0.50 annually (a 1.2% yield), Bed Bath & Beyond has a good shot at increasing its annual payout, with $5.67 in full-year EPS estimated by 2020.

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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.

The Motley Fool owns shares of Becton Dickinson and Oracle. It also recommends Bed Bath and Beyond. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.