Most analysts agree that 2017 will likely be a positive year for stocks. But, when taking a deeper look, a market rally might not benefit all stocks evenly; some sectors might experience more growth than others. That said, one of the most important factors used when judging the value of a stock is its dividend growth rate. Since dividends are a function of a stock’s earnings, dividend growth can be a very informative window into the well-being and quality of a stock, revealing its future return potential more reliably than by looking at a stock sector alone.
Reality Shares created DIVCON, a dividend health rating system, to assess dividend-paying stocks in the S&P 500. Putting the system into action, we forecast dividend increases or decreases within the next 12 months by rating stocks on a scale of 1 through 5. A DIVCON rating of 3 or above shows an increasing likelihood of a dividend increase, whereas a DIVCON rating of 1 or 2 is given to a stock likely to cut its dividend.
We are very excited about the overall future of dividend growth, however, not all dividends are treated equally. To that end, here are the dividend winners and losers of the next 12 months, according to DIVCON.
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Dividend Winners
1. Cintas (ticker: CTAS) – DIVCON 5
At the top of our list is corporate apparel maker Cintas. The stock has increased its annual dividend for 14 of 15 consecutive years, growing 500% since 2002. From its third-quarter earnings report, the stock reported a 466% year-over-year increase in operating cash flow and its 14th consecutive quarter of year-over-year gross margin improvement. DIVCON’s analysis of the company’s earnings-per-share (EPS) growth, dividend history, cash flow and other factors has earned the stock a DIVCON 5 rating, showing a high likelihood for dividend increases.
2. Intuit (ticker: INTU) – DIVCON 5
Intuit is next on our list of dividend winners. The creator of TurboTax, Mint, QuickBooks and other financial software products, Intuit boasts consecutive annual dividend increases since 2011. In May, the company reported earnings and revenue that topped consensus estimates for its fiscal third quarter. The tech stock has a DIVCON 5 rating and shows potential for more dividend upgrades.
3. Smucker (ticker: SJM) – DIVCON 5
Our last winner is J.M. Smucker. As we stated in March, the stock has held a strong DIVCON rating for several quarters and has maintained strong dividend growth potential. In addition to selling a popular fruit spread, Smucker has served out years of dividend growth to investors and recently beat earnings and revenue estimates. From its fourth-quarter report, the company also expects increased sales and EPS in 2018. Its DIVCON 5 score can be heavily attributed to its strong cash flow, earnings history, positive outlook and track record of dividend increases.
Based on DIVCON scores, these stocks have shown, and continue to show, potential for dividend increases, which can also be a good sign for the stock’s total return potential.
Here are stocks with low DIVCON ratings, and are therefore stocks whose dividends may be cut.
Dividend Losers
1. Alcoa (ticker: AA) – DIVCON 1
After an earnings beat in April, many predicted that Alcoa might stage a rally in 2017. Last year, the former heavyweight stock shed its partnership with Arconic and set out on its own path after a spinoff. On a macro level, the corporation reported expectations of excess demand in aluminum, which may invite a haircut to earnings. Also, the stock hasn’t raised its dividend for years, and Alcoa may even put the dividend on the chopping block if its cash reserves dwindle. Alcoa’s low DIVCON rating can be attributed to below-average EPS growth, cash flow and other fundamentals.
2. Wynn Resorts (ticker: WYNN) – DIVCON 1
It is without question that Wynn Resorts offer guests a relaxing, luxurious experience. However, there may be better picks for dividend growth. The stock tumbled over 50% in 2015, and returned just over 25% last year — hinting the stock may still need to make up lost ground before growing its dividend. Wynn’s dividend payout likewise fell 50% in 2015, and has remained unchanged ever since. According to DIVCON’s seven factors the stock has below-average to average cash flow, and earnings per share growth relative to other dividend-payers. Its resulting DIVCON 1 rating reflects that it may take time for the stock’s quarterly dividend to grow organically, if it isn’t cut in the meantime.
3. American Capital Agency Corp. (ticker: AGNC) – DIVCON 1
The migration of investments from low to high yield is now an old story. However, real estate was one of the biggest recipients of the jump into high-paying income stocks after 2008. Now rising interest rates and a dip in housing demand may present a challenge to real estate investment trusts (REITs). DIVCON’s analysis reveals that American Capital Agency has had a spotty dividend history over the last five years. American Capital Agency’s dividend may be cut.
4. CenturyLink Inc. (ticker: CTL) – DIVCON 1
CenturyLink is the final stock on our list of potential dividend cutters. After posting a 20% percent decrease in earnings, the stock appears to be experiencing a rough patch overall, not just its dividend. The firm’s pending $34 billion acquisition of Level 3 Communications will be met with lackluster EPS growth, weak cash flow and potential complications after integration. The stock may be able to make a turnaround, however, the trouble doesn’t end there. Legal challenges have recently developed for the telecommunications company. Citing high-pressure sales practices, a class-action complaint was filed against CenturyLink in June, pursuing damages as high at $12 billion. Time will tell the stock’s health, but these challenges present risk to dividend investors. The telecommunications giant has had a DIVCON 1 rating for at least a year—a red flag for dividend growth.
Taking Action
Dividend growth investing is one of the most compelling strategies available. Investors can potentially capitalize by holding long positions in stocks with the highest dividend growth potential, or short positions in stocks likely to cut their dividends.
DIVCON acts as a guide to pinpoint a stock’s dividend growth potential. Using DIVCON, Reality Shares offers a suite of ETFs to capitalize on dividend growth.
Click here to learn more about DIVCON and for important disclosures.
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