Want Growing Income? These 4 Dividends Are Set to Surge

Looking for the next wave of dividend growth machines? These 4 companies are a good place to start.

| More on:
The Motley Fool

Many investors, especially those nearing retirement, are looking for similar types of stocks. They want to invest in companies with solid operations, sharp management, and steadily growing businesses. Generally, these types of stocks have one thing in common — they have solid dividends that tend to grow over time.

Investors who are a few more years from retirement might look to slightly alter their dividend growth strategy. Instead of buying stocks with solid current yields in the 3-4% range with solid growth prospects, why not buy companies with current yields below 3% that have the potential to grow dividends at a higher clip over the next decade?

These companies are somewhat difficult to identify, since trying to guess which will have continued success over a decade isn’t exactly the easiest thing in the world. Still, there are certain things we can look at that may suggest a company has potential for huge dividend increases. Here are four that could reward investors.

Saputo

If everything comes together for Saputo (TSX: SAP), investors are not only looking at a dividend machine, but also a stock with substantial capital gains.

The company has transformed itself from Canada’s largest dairy producer into a significant worldwide player, with operations in the U.S., Argentina, and most recently, Australia. Not only does its recent acquisition of Warrnambool give it exposure to the Australian market — which, per capita, is one of the largest milk consuming markets in the world — but it also opens high-growth export markets such as China and South Korea to the company’s dairy products.

Plus, Saputo’s current dividend payout ratio is just 35% of its net earnings. This low payout ratio, combined with potential earnings growth, means the 23-cent quarterly dividend could be significantly higher in five years.

Imperial Oil

Imperial Oil (TSX: IMO)(NYSE: IMO) is one of Canada’s largest oil and gas producers, has Canada’s largest refining operations, and operates more than 1,800 service stations. It produces more than 250,000 barrels of oil per day from operations that span all of Canada, including exposure to the oil sands.

It also only pays out a 52-cent annual dividend, a yield of just less than 1%. Investors looking for current income will be less than impressed, but people looking into the future will see a company paying just 15% of its net income out as dividends. Imperial Oil could easily quadruple its dividend, just based on current earnings. Look for the company to increase its dividend in a big way in the future.

Metro

Another company with a strong payout ratio is Metro (TSX: MRU), Canada’s third largest grocer. The company, which has more than 350 stores in Ontario and Quebec, pays out just 26% of its net income out as dividends, good enough for a current yield of 1.8%.

Metro has already begun rewarding shareholders, increasing its dividend five times over the past five years. Investors who bought shares five years ago were not only rewarded with a 90% increase in the share price, but they’d also enjoy a yield on cost of nearly 4%.

While analysts aren’t forecasting spectacular earnings or revenue growth for the company, it still should have no problem rewarding shareholders with an annual dividend increase for years to come. It’s a good, steady performer, which also should provide security during the next market downturn.

Gildan Activeware

Even though shares in Gildan Activewear (TSX: GIL) currently only yield a paltry 0.8%, the company has terrific potential as a dividend growth stock.

The current payout ratio is a microscopic 17% of net earnings. That, combined with the company’s impressive growth — it has almost doubled revenue and increased net profit by 50% since 2010 — mean it’s poised to start increasing its dividend in a big way.

The company has already started to reward shareholders, increasing its quarterly payout more than 50% since first starting to pay it in 2011. The company also has a pristine balance sheet with very little debt, leaving it plenty of wiggle room to reward shareholders with ever increasing dividends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

money cash dividends
Stocks for Beginners

Where to Invest $10,000 in April 2024

If you've already created a diversified portfolio and are looking for more options from a windfall, here is where I…

Read more »

data analyze research
Investing

The Ultimate TSX Stock to Buy With $1,000 Right Now

Brookfield Asset Management (TSX:BAM) is one of the best Canadian stocks to buy for those looking to put capital to…

Read more »

young woman celebrating a victory while working with mobile phone in the office
Dividend Stocks

3 CRA Benefits Most Canadians Can Grab in 2024

You can save on taxes by claiming the dividend tax credit on Fortis Inc (TSX:FTS) shares.

Read more »

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »