Don't get lulled into a false sense of security.
Yes, it's been an amazing run for the markets this year. The 17% surge in the Dow Jones Industrial Average since the beginning of 2019 has made us forget all about the market's woes last December. That 700-point freefall on Christmas Eve is now just a distant memory.
The prospect of an interest rate cut has provided a temporary distraction. But understand that the Federal Reserve is only shifting course and loosening monetary policy because it sees darkening in the macro skies.
Now more than ever, it's important to focus on what's working in the market. And what better way to start than by looking for companies that are raising their dividends?
After all, all things being equal, if a company is giving shareholders a raise at this late point of the economic cycle, then there's a good chance management has confidence that it can generate enough cash to cover the payout in any condition.
That's why every month I make a point to research possible dividend raisers for the next month or so and share my findings with my High-Yield Investing premium subscribers.
This month, I've found three intriguing candidates...
1. Texas Instruments (NYSE: TXN) -- Many companies can claim to have raised dividends in each of the past three years. But only a select few have increased them by 100% or more. TXN is one of those. Last year's 24% hike lifted the payout to $0.77 per share – double the $0.38 level from 2015.
Thanks to efficient manufacturing, TXN is enormously profitable, turning every dollar of sales into nearly 40 cents of free cash flow (FCF). That FCF generation ranks in the 91st percentile, outperforming more than nine out of every 10 U.S. companies. And returns on invested capital have risen to the top of the charts (97th percentile).
The shareholder-friendly company returns 100% of FCF, every last penny, to stockholders. Management intends to deliver between 40% and 60% via annual dividends (right in our sweet spot) and the rest through continued stock buybacks to shrink the share base even further. Since 2004, the number of outstanding shares has been cut nearly in half, meaning shareholders now have almost twice the pro-rata ownership interest in this outstanding business.
I suspect TXN has another nice dividend surprise in store for investors next month.
2. Store Capital (NYSE: STOR) -- Much like the better-known Realty Income, this landlord manages a growing collection of single-tenant properties rented out under triple-net leases (where the renter covers all variable expenses). The company owns a national portfolio of 2,300-plus properties occupied by restaurants, furniture stores, car dealers, manufacturers and others. Occupancy rates currently stand at 99.7%.
Thanks in part to automatic yearly rate hikes on most properties, adjusted funds from operation (AFFO) has been growing at an annual pace of 7.3% in recent years – and dividends have marched in lock-step. Since 2015, distributions have risen from $0.27 to $0.29 to $0.31 to $0.33 per share.
Over the past year, STOR has invested $1.6 billion to acquire 418 new properties earning average rental yields of nearly 8%. In turn, AFFO has surged about 26%, dropping the payout ratio below 70%. With that in mind, I expect to see another healthy dividend increase next month. That could lift the yield above 4% -- making STOR a prime portfolio candidate for High-Yield Investing.
But don't just take my word for it. This is Warren Buffett's favorite REIT -- Berkshire Hathaway has acquired over 18 million shares.
3. McDonald's (NYSE: MCD) -- There's something to be said for brand loyalty, and the Golden Arches stays packed with devoted customers morning, noon and night. The typical location generates about $2.7 million in annual sales – more than double the industry average for quick-serve restaurants.
And there are 37,000 locations worldwide. Independent franchisees own 95% of those stores, feeding the parent company a steady, annuity-like stream of cash.
After 42 straight years of dividend hikes, this Dividend Aristocrat is now serving up $900 million in dividends ($1.16 per share) each quarter. That's a lot of Big Macs. And starting next month, that payout just might rise to the $1 billion mark.
Following the rollout of system-wide productivity enhancements, McDonald's has delivered 15 consecutive quarters of positive same-store sales growth, while boosting operating margins into the mid-40s. Citing the positive impact of last year's tax cuts, management has also touted "increased capital allocation flexibility."
The relentlessly rising share price has kept yields below 2.5% (not that shareholders mind). But late September will likely bring another upward move, fulfilling management's pledge to return $25 billion in cash to investors in the three years ending this year.
Action To Take
Remember, just because these stocks are likely to increase dividends doesn't necessarily make them "buys." We won't be adding them to the High-Yield Investing portfolio right away without doing our own due diligence, and neither should you.
That said, we'll be watching these names closely. If any of these stocks interest you, then I'd suggest doing the same. In the meantime, if want to know about my absolute favorite high-yield picks, then I invite you to check out my latest report right here...