As an income investor, my favorite combination is a high-yielding stock poised for above-average dividend growth.
Fortunately, these stocks aren't that difficult to find if you know what to look for. I find the best dividend growth prospects are companies with moderate payouts, steady growth prospects and plenty of cash. (In the case of utilities, pipelines and real-state investment trusts (REITs), I don't mind a high payout as long as the business generates ample cash flow to cover dividends.)
My screen for identifying companies with strong prospects for dividend growth consisted of the following: U.S. stocks with mid-sized to large market valuations, yields above 3% and a dividend payout that is less than 50% of earnings. My results yielded 49 companies that passed these initial filters. I then refined the list further to only include companies with enough cash to cover annual dividends.
These four stocks are the best of the lot. They already offer safe, high yields -- and could easily afford to double the current dividend.
1. Intel (Nasdaq: INTC)
Intel is becoming one of the largest mobile phone chip-makers in the world. That's important because demand for mobile computing devices like netbooks and smartphones is skyrocketing. Mobile devices accounted for 57% of all computing device sales last year and will overtake desktops by 2014. By any measure, Intel serves a large, growing and lucrative market.
Intel gained a foothold in the growing security tech sector last August by acquiring McAfee, a computer antivirus software maker for about $7.7 billion. The company sees tremendous growth opportunities from a 2012 pipeline that includes the Ultrabook, a high-end version of netbook systems, and Intel-powered smartphones and tablets.
Intel reported full-year 2011 revenue of $54 billion, operating income of $17.5 billion and earnings per share (EPS) of $2.39 -- all records. Revenue was up 24% from last year, and EPS was 19% higher.
Analysts forecast 12% earnings growth in each of the next five years.
Intel's dividend payout is just 33% earnings, and cash flow of $21 billion last year provided a five-fold coverage of dividends. Intel currently has cash and equivalents totaling $2.93 per share, or three times the $0.84 annual dividend.
2. Lockheed Martin Corp. (NYSE: LMT)
Lockheed is a leading defense contractor and the No. 1 provider of IT services, systems and training to the U.S. Government.
The company is also ramping up sales of its Joint Strike Fighter aircraft (F-35). This stealth fighter is invisible to radar and capable of vertical take-off and landing. Lockheed has already secured orders for 3,000 of these aircraft from the U.S. military and nine foreign partners. If replacement parts and services are included, then the value of these orders could exceed half a trillion dollars.
Lockheed's earnings from continuing operations rose 4% in 2011, from $2.6 billion to $2.7 billion. EPS climbed 11% from $7.10 to $7.85. Analysts target earnings growth of 8% a year for the next five years.
Lockheed has raised dividends nine years in a row, including a 33% increase last year, to a $1.00 annual rate. Even after the big dividend hike, the payout remains modest at 36% of earnings. The company also has cash of $12.51 per share to easily cover the $1.00 annual dividend.
3. ConocoPhillips (NYSE: COP)
This oil and gas giant is completing a three-year business plan that involved asset sales, debt reduction and a 32% growth in the dividend. It's also in the process of spinning off its refineries and service stations into a separate business that will be called Phillips 66. The good news is that the company's dividend payout will remain the same at 32% of earnings, plus the new entity will also pay a dividend. So if you buy shares prior to the spin-off, then you'll lock in a second dividend that boosts overall yield.
ConocoPhillips benefits from higher production and refinery utilization as well as improving oil prices. Earnings improved 9% in 2011 to $12.4 billion, while earnings per share rose 18% to $8.97. ConocoPhillips has cash totaling $5.8 billion or $4.54 per share to cover the $2.64 annual dividend and produced $20 billion of cash flow in the last 12 months. Consensus estimates look for 7% yearly earnings growth in the next five years.
4. The Williams Companies Inc. (NYSE: WMB)
This integrated natural gas producer and pipeline company operates in the Rocky Mountains, Gulf Coast, Pacific Northwest, Eastern Seaboard and the Marcellus Shale region in Pennsylvania.
Improved production from its shale plays has allowed Williams to take advantage of rising energy prices. For the first nine months of 2011, Williams' income from continuing operations was $679 million, or $1.14 per share, compared with $502 million, or $0.86 per share, for the same period in 2010. The company expects to grow earnings by 20% a year for the next five years.
Williams raised the dividend 25% in November to a $1.00 annual rate and plans to grow dividends every quarter in 2012. The company forecasts the 2012 dividend at $1.09 per share and is committed to 10% to 15% annual dividend growth in the next few years.
Williams completed a tax-free spin-off of its exploration and production unit in January into a new company called WPX Energy (NYSE: WPX). Shareholders received one share of WPX Energy for every three Williams shares.
Risks to consider: All four companies have strong dividends, but an energy price drop could slow growth for Williams and ConconoPhillips, while defense spending cuts would hurt Lockheed.
Action to take --> Aggressive guidance for dividend growth makes Williams my top pick, but ConocoPhillips is also appealing because investors can secure two dividends and overall higher yield.