BALTIMORE (Stockpickr) -- Nothing does a better job of selling dividend investing like a market correction. So, in a lot of ways, the almost 5% decline in the S&P 500 this year was really a sales pitch for dividend investing.
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Dividends are one of just a few ways that companies can directly impact their share prices. And between record earnings and more than $1.25 trillion in cash held on S&P 500 companies' balance sheets, there's a lot of latent value yet to be unlocked.
More important, that value translates into capital gains.
Over the last three and a half decades, dividends stocks have outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, according to data compiled by Ned Davis Research. The numbers are even more compelling when looking at companies that consistently increase their payouts.
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To take advantage of that trend today, we're focusing on dividends stocks that look ready to hike their payouts. So instead of chasing yield, we'll try to step in front of the next round of stock payout hikes.
For our purposes, that "crystal ball" is composed of a few factors: namely a solid balance sheet, low payout ratio, and a history of dividend hikes. While those items don't guarantee dividend announcements in the next month or three, they do dramatically increase the odds that management will hike their cash payouts to shareholders.
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Without further ado, here's a look at five stocks that could be about to increase their dividend payments in the next quarter.
First up is oil and gas supermajor Chevron (CVX). While Chevron falls short of being the biggest energy company in the world, the No. 2 oil company in the U.S. makes up for it by sporting one of the most solid financial footings in the industry.
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With more than $25.1 billion in net cash and investments on its balance sheet, Chevron is well-positioned to give investors a dividend hike in the near-term. For now, CVX pays a quarterly $1 check to investors, adding up to a solid 3.6% dividend yield.
Chevron's scale is immense. The firm has proven reserves of 11.3 billion barrels of oil equivalent and pulls more than 2.6 million barrels out of the ground each day. High oil prices have been a big boon for Chevron's operations; with crude prices sitting on the high end of their historic range, more of the firm's wells are economically viable now than ever before. Because around 70% of Chevron's production is oil, the firm also has the smallest natural gas exposure of the supermajors right now. While Chevron's recent natgas investments are closing that gap, CVX still has amplified exposure to the more lucrative commodity.
Earnings in April could be the perfect opportunity for Chevron to announce a dividend hike. While the firm's $1 quarterly check is hefty versus peers right now, CVX has the wherewithal to give shareholders another raise.
A decade ago, who would have thought that Cisco Systems (CSCO) would be considered a dividend stock? But with a 3.02% dividend yield at current prices, it's hard to say that the IP networking giant is anything but that. And now investors should be looking out for a hike in CSCO's 17-cent quarterly dividend in 2014.
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Cisco Systems is the standard bearer in the enterprise networking market -- its hardware and software are ubiquitous in server rooms around the world. That gives Cisco a huge tailwind in 2014, as demand for global data connectivity increases demand for Cisco's mission-critical routers and switches. Because Cisco's gear is designed to plug-and-play with other Cisco components, IT departments can often better justify keeping purchases within the Cisco family to keep integration and ongoing tech support costs lower. As competition ramps up in the space, that high switching cost is critical for CSCO to hold its market share.
Financially, Cisco is another name that's in stellar financial shape. Cisco holds more than $32.8 billion in net cash on its balance sheet, enough to pay for almost 30% of its outstanding shares at current price levels. That huge cash cushion takes a lot of risk off of investors right now, and it makes a boost to Cisco's dividend payout look likely.
Macaroni and cheese, peanut butter and jelly, dividends and utility stocks -- all three just go together. So it shouldn't come as a big surprise that $36 billion electric utility holding firm Southern Co. (SO) is making our list of potential dividend hikers this week. Right now, Southern pays out a 50.75-cent quarterly dividend that adds up to a 4.97% yield at current price levels.
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As its name implies, Southern's main business is focused on the Southeastern states, serving more than 4.4 million customers spread across Alabama, Georgia, Florida and Mississippi. The firm also owns more than 45,700 megawatts of generating capacity and a merchant generation business. As a regulated utility, Southern earns predictable rates on equally predictable power demand. That makes the firm (and other utility stocks) purpose-built to generate consistent dividend payouts.
Southern has a strong history of dividend hikes -- the firm has raised its dividend for 13 straight years now. While that makes SO a bit of a lay-up when it comes to predicting dividend hikes, the bigger yield than peers makes Southern worth watching in the months ahead.
Speaking of dividend lay-ups, next on the list is Kinder Morgan (KMI).
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Kinder Morgan is another name that's become synonymous with dividends. This pipeline stock currently pays out a 41-cent dividend that adds up to a hefty 4.88% yield. Typically, Kinder Morgan hikes its payout on a quarterly basis, but the firm has held its rate flat for the last two quarters. That makes KMI overdue for a dividend raise.
At first glance, Kinder Morgan's structure is a bit tricky. The firm is technically a holding company that owns the general partner and incentive distribution rights for Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners (EPB), two MLPs; that's exactly what makes it an investment vehicle designed to maximize distribution income for investors.
One of the big benefits of KMI (besides the fact that it's the largest midstream company out there) is that it's a conventional C corporation rather than an MLP. That means that it sports a much simpler tax treatment for investors. Keep an eye out for earnings in the middle of April as a potential dividend announcement date.
Last up is Reynolds American (RAI), a $25 billion cigarette stock that owns popular premium brands like Camel, Kool and Natural American Spirits. Reynolds is a typical "sin stock" -- it sports recession-resistant sales, a sticky customer base and generates the cash to pay for a hefty dividend yield. Right now, the firm's 63-cent dividend works out to a 5.27% yield.
Like other tobacco companies, Reynolds is a business that's been dying a slow death. As the mature U.S. cigarette market sees fewer new smokers, the growth really isn't there for RAI -- and because the firm sold off its international rights to Japan Tobacco in 1999, high-growth markets in Southeast Asia and Latin America are off-limits. But the slowness of the market shrinkage means that Reynolds isn't going away anytime soon. With new initiatives such as the Vuse brand of electronic cigarettes offering some scant hints at growth, Reynolds should maintain its cash-generation engine for the foreseeable future.
Financially, Reynolds is in solid shape with reasonable balance sheet leverage and a $2.7 billion cushion of cash. Don't expect this stock to post breakneck numbers in 2014, but investors look due for a dividend raise anyway.
To see these dividend plays in action, check out the at Dividend Stocks for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor toTheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
Follow Jonas on Twitter @JonasElmerraji