Image source: Getty Images.
Continue Reading Below
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 their dividend payments.
Gilead Sciences, Inc.
We'll begin the week by taking a closer look at a biotech behemoth that's potentially guilty of being too good: Gilead Sciences (NASDAQ: GILD).
Gilead Sciences' claim to fame is its hepatitis C product portfolio (Harvoni, Sovaldi, and Epclusa). Gilead was the first company to bring an effective once-daily cure to pharmacy shelves, and it's not really relinquished its market share since. Its issues of late stem from its need to provide larger gross-to-net discounts to insurers for Harvoni, the HCV drug designed to treat the most common type of hepatitis C, genotype 1, and its having already nabbed the low-hanging fruit in the HCV market within the U.S.
Image source: Getty Images.
However, don't think for a moment that declining EPS and revenue estimates are a reason to avoid Gilead. For starters, Gilead's HCV products still have a massive market opportunity to hit. Even with the low-hanging fruit in the U.S. out of the way, Gilead has ample opportunity to treat the estimated 180 million people worldwide infected with hepatitis C. Even though some of these people aren't in countries where Gilead would receive the best margins, it nonetheless represents a long runway of opportunity. Not to mention the fact that none of Gilead's peers have even come close to improving the treatment timeframe and supplanting Gilead's therapies.
Gilead Sciences is also a mammoth in the HIV treatment space. The company has around a half-dozen oral HIV innovations under its belt, with Stribild and Genvoya being among the most impressive and fastest growing treatments.
Combined, Gilead's HCV and HIV franchises, along with its smaller approved therapies, should allow it to generate $15 billion or more in annual free cash flow through the end of the decade. This gives Gilead more than enough capital to seek out acquisitions and boost its shareholder yield. Remember, the last time Gilead made a big acquisition it acquired Pharmasset's leading asset, which spawned its HCV line of drugs.
Currently paying out $1.88 annually (a 2.6% dividend yield), but slated to earn in excess of $10.50 per share each year through 2019, Gilead is a strong candidate to double its payout to shareholders.
Union Pacific Corporation
Another attractive rebound candidate is railroad giant Union Pacific (NYSE: UNP), which just finished up a challenging 2016.
With commodity prices still challenged, Union Pacific found the sledding tough in most of its major freight categories. Coal freight revenue fell 6% in the fourth quarter, while chemicals were flat. The lone bright spot was agricultural products, where freight revenue rose 7%.
Image source: Union Pacific.
The good news is that a number of macroeconomic factors are looking up in 2017. For instance, consumer confidence is improving, which is great news for a cyclical logistics company like Union Pacific. Even more intriguing, energy prices are on the mend. Though higher energy prices boost its diesel fuel costs, they also have a positive impact on other commodity costs, as well as on Union Pacific's pricing power per carload.
Despite its 2016 weakness, Union Pacific also managed to improve its operating ratio by 120 basis points to 62%. The key reason Union Pacific was able to improve its margin in the face of a weak commodity market was its stringent cost-cutting. As noted by my Foolish colleague Joe Tenebruso, Union Pacific reduced its locomotive count by 5%, while trimming its train, engine, and yard workforce by 7%. Having levers to pull is a nice thing for a cyclical logistics company when commodity prices can seemingly change at the flip of a switch.
Considering that locomotives are a more fuel-efficient mode of transport than trucks as a function of total freight transported, it's unlikely that we're going to see freight transport by rail decline for any extended period of time. With Union Pacific currently paying out $2.42 annually (a 2.3% dividend yield), but on track for more than $8 in full-year EPS by 2020, a doubling of its dividend could be possible over the next five-to-10 years.
JPMorgan Chase & Co.
Sticking with the theme of gigantic companies, the last attractive income stock this week is money center bank JPMorgan Chase (NYSE: JPM).
JPMorgan Chase has been hindered by a confluence of factors in recent years. For example, dovish monetary policy from the Federal Reserve has constrained its net interest margins, all while tougher regulations imposed from the Fed increased its expenses and reduced existing paths to profitability. As icing on the cake, the banking sector has been a pin cushion for fines since the Great Recession, most of which stem from its mortgage practices.
Image source: Getty Images.
On the plus side, these issues appear to be in the rearview mirror now. Though the Fed has only raised its benchmark federal funds rate twice over the past decade, it's firmly switched from a dovish to hawkish monetary policy. This lends hope that interest rates are going to head higher in the months and years to come. Higher interest rates help boost the net interest income banks generate from their variable loans.
According to JPMorgan Chase's latest analysis, a 100-basis-point increase in short- and long-term lending rates would add $2.8 billion in additional net interest income, while a 200-basis-point increase in both would lead to $4.5 billion in additional interest income. For what it's worth, 200 basis points would be very close to the Fed's targeted rate of 3%.
Also, JPMorgan Chase stands to benefit from the possibility of relaxed regulations in the banking industry under the Trump administration. If Trump holds to his word and removes a number of banking regulations, it would become substantially easier for JPMorgan Chase and its peers to return money to shareholders.
Currently, JPMorgan Chase is paying out $1.92 annually (a 2.3% dividend yield), but Wall Street is looking for $7.47 in full-year EPS by 2018. This would appear to be a recipe for a higher payout ratio and a bigger dividend in JPMorgan's future.
10 stocks we like better than JPMorgan Chase When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and JPMorgan Chase wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of January 4, 2017