When investors are looking to boost the number of stocks in their portfolios that are paying dividends, it’s tempting to focus on the stocks with dividend yields of about 2.5% or higher. After all, the average stock in the S&P 500 has a dividend yield of nearly 2%. So, shouldn’t investors expect a meaningfully higher yield from the stocks they buy specifically to help generate income?
But the problem with only looking at dividend stocks above a given dividend yield is that there are plenty of high-quality dividend stocks with lower dividend yields, yet faster-growing dividends. Two underrated dividend stocks that investors looking for income may want to consider adding to their portfolios are media giant Walt Disney (NYSE:DIS) and financial software company Intuit (NASDAQ:INTU).
Intuit’s dividend yield of just 0.8% is likely far too low for most income investors to consider. But a close look at Intuit shows it’s more compelling as a dividend stock than it appears on the surface.
Not only does Intuit sport a low payout ratio (the percentage of earnings a company is paying out in dividends) of just 33%, but there’s good reason to believe Intuit will see steep growth in its dividend in the coming years. Highlighting the company’s recent commitment to dividend increases, Intuit’s dividend has increased at an average rate of 24% annually over the last five years. Though this growth decelerated to a 15% hike for Intuit’s most recent dividend increase, management’s guidance for 25% growth in non-GAAP earnings per share in fiscal 2018 suggests Intuit’s business will easily support more strong dividend growth.
It’s also worth noting the undeniable momentum of Intuit’s underlying business. In the company’s most recent quarter, for instance, Intuit saw its QuickBooks Online subscribers increase 45% year over year. Further, Intuit’s online ecosystem was up 41% year over year. With catalysts like this, Intuit looks positioned to see double-digit growth in revenue and earnings per share over the long haul, supporting years of meaningful dividend increases.
It’s a well-known fact that Disney pays a dividend. After all, the company has been paying dividends for decades. But since Disney’s dividend yield has trended fairly low (mostly between about 1% and 1.8% over the last 10 years), the media company has avoided the limelight as an income investment. However, Disney’s enduring business, conservative valuation, strong free cash flow, low payout ratio, and strong dividend growth make it a great bet for investors looking to invest in a company with a dividend likely to grow substantially over the next decade.
Disney’s dividend yield is just 1.7%, but investors should note that the media juggernaut is only paying out 22% of its earnings, leaving plenty of room for dividend growth. Further, Disney’s average annual dividend growth of 21% over the last five years suggests management is prioritizing dividend growth. While there’s no guarantee growth like this will continue, the company’s significant free cash flow, low payout ratio, and 12% year-over-year earnings-per-share growth over the last 12 months certainly imply there’s more dividend growth to come.
Neither Intuit or Disney are screaming buys as dividend investments. But they’re certainly compelling enough to consider adding to an income-focused portfolio as small positions.
