Dividend investing is both an art and a science. Huge dividend yields are value traps as often as they provide great payouts for the long run. The best income stocks of tomorrow might not even have a dividend policy today.
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To help you build a great portfolio of income investments for the ages, we asked a few of your fellow investors here at The Motley Fool to share their best under-the-radar dividend tips. Read on to see how they came up with OLED technology researcher Universal Display (NASDAQ: OLED), specialty glass veteran Corning (NYSE: GLW), and property management giant Jones Lang LaSalle (NYSE: JLL).
The world's top specialty glass maker
Leo Sun (Corning): Specialty glass and ceramics maker Corning isn't considered a big dividend play, since its forward yield of 1.9% merely matches the S&P 500's current yield. But it has hiked that dividend annually since 2013.
Corning has plenty of room to raise that payout, which only used up 26% of its earnings and 67% of its free cash flow over the past 12 months. Its earnings and free cash flow should continue rising over the next few years, thanks to several major tailwinds.
Corning's fastest-growing business is its Specialty Materials business, which mainly produces Gorilla Glass for consumer electronics. That unit's revenue rose 26% annually last quarter and accounted for 14% of its top line. Corning is expanding that business with Gorilla Glass Auto for cars and Gorilla Glass SR+ for wearables.
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Corning's Optical Communications business, which accounted for about a third of its sales last quarter, is also generating double-digit sales growth -- thanks to rising demand from service providers.
Its Life Sciences business is also growing, thanks to demand for Valor Glass pharmaceutical glass packaging, as is its Environmental Technologies unit, which is seeing strong demand for ceramic substrates and filter products for vehicle emissions control. Its only soft spot is its Display Technologies business, which is struggling with sliding LCD prices.
Nonetheless, Corning's strengths outweigh its weaknesses, and analysts expect its revenue and earnings to respectively rise 7% and 11% this year. The stock also remains fairly cheap at 15 times earnings.
This 0.07% yield is no joke
Anders Bylund (Universal Display): I know what you're thinking. The researcher behind today's organic light-emitting diode (or OLED) screens is a high-growth tech stock. Companies like these rarely pay any dividends at all, and Universal Display just barely breaks that mold.
But that's why only in-the-know investors are in on this long-term dividend play.
This dividend policy was started eleven months ago and has just four quarterly payouts under its belt. At $0.03 per share, per quarter, that works out to an annual dividend yield of 0.07% at today's $180 stock price. That's not a typo. Invest $10,000 in Universal Display today and collect a princely total of $7 in annual payouts.
So it's not much of an income-generating machine today, but the company's leaders plan to make it a serious yielder over time.
The original dividend announcement "reflects the Board of Directors' confidence in Universal Display's robust future growth opportunities, expected continued positive cash flow generation, and commitment to return capital to our shareholders," according to CFO Sid Rosenblatt. "We believe this is a good place to start."
In other words, the dividends should grow as Universal Display's cash machine gathers momentum. Getting in on the early action will set you up for tremendous dividend yields several years down the road. These payouts are a letter of intent, a vote of confidence in the business from the company's leadership, and a quirky but real reason to take Universal Display seriously.
This may not be a dividend stock for impatient investors, but it's a promising choice for sophisticated income-hunters.
A centuries-old real estate titan with room to build its payout
Chuck Saletta (Jones Lang LaSalle): Property management giant Jones Lang LaSalle is something of an outlier among real estate oriented companies. Like many businesses involved with property management, it pays a dividend, but nowhere near as much as it could. Its current payout ratio is a mere 9.1% of its trailing earnings.
That conservatism extends beyond just its dividend payout. Jones Lang LaSalle also employs very little debt on its balance sheet relative to either its assets or its revenue levels, another rarity among real estate-related businesses. By managing, rather than owning, real estate, it gets a decent revenue stream without the high costs and debt loads associated with owning facilities. That's what enables it to thrive in the property industry without the debt loads so common among real estate titans.
Its overall conservatism is likely one key reason why the company can actually trace its history back to 1783. Longevity like that takes the right balance of risk taking with prudence, and Jones Lang LaSalle seems to have found the ability to grow via smart rather than excessive risks.
That's what makes Jones Lang LaSalle a great potential dividend investment for in-the-know investors. Smart investors know that it takes far more than just looking for the highest yield to make real money with dividends. Jones Lang LaSalle has found a way to profitably operate in the property management space and pass a bit of its earnings on to its shareholders.
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Anders Bylund owns shares of Universal Display. Chuck Saletta has no position in any of the stocks mentioned. Leo Sun owns shares of Corning. The Motley Fool owns shares of and recommends Universal Display. The Motley Fool also recommends Corning and Jones Lang LaSalle. The Motley Fool has a disclosure policy.