Successful investing demands a balance between what we know about the past and what we think about the future. Today's great dividend-payer may not be such a great idea for the portfolio if the company's business is eroding and competitors are capturing the revenue it needs to fund those dividends. Likewise, a stock that may be entirely inappropriate for a dividend portfolio today could nevertheless emerge as a star dividend-payer in the future.
With that in mind, consider a few companies that may not be great dividend ideas today (or may not pay one at all!) but could emerge as time goes on and the businesses mature.
Tutorial: 20 Investments To Know
I have lamented on more than one occasion that outside of pharmaceuticals, there is a distinct lack of quality dividend-payers in the healthcare space. Nevertheless, companies like St. Jude (NYSE:STJ) and Stryker (NYSE:SYK) could be part of a change in that tradition.
St. Jude has a very attractive pipeline of growth prospects and a solid present-day business in areas like cardiac rhythm management, neurostim and heart valve replacement. St. Jude presently has considerable debt and formidable competitors, but it also has robust free cash flow and it is not so hard to imagine that a dividend could be in the company's future.
Stryker already pays a dividend, but the maturation of the orthopedics and medical equipment businesses could argue for a higher future payout, tempered by the company's apparent desire to expand into additional lines of the med-tech sector. (For related reading, check out Great Dividend Payers In Medical Technology.)
Adding Intuitive Surgical (Nasdaq:ISRG) to a list of future dividend-payers may seem insane given its present growth. Nevertheless, the company generates over $10 a share in free cash flow. What's more, Intuitive has built itself as a razor/razor blade business with future growth and margins tied to ongoing use of the robots. While there is still ample opportunity to sell more "razors" and extensive product development opportunities, Intuitive may soon find itself with more cash than it needs or can use.
With Weyerhaeuser's (NYSE:WY) decision to become a REIT, it may seem a no-brainer to assume that the company will become a more significant dividend payer. Add to that the fact that Weyerhaeuser is the world's largest owner of softwood timberland and that there's a fairly successful history of timber companies as dividend producers (Plum Creek (NYSE:PCL), to offer one example).
All of that said, election to take REIT status does not produce more distributable cash flow (apart from the tax savings, that is) and Weyerhaeuser will need to see a revival in housing to really prosper - both for the timber demand it will bring and the added value of its dual-purpose real estate holdings - timberlands that could be sold to property developers for housing. (For more, see Timber Investments Cut Down Portfolio Risk.)
Turning to the oil patch, some have suggested that Exxon Mobil (NYSE:XOM) is destined to become an entity that exists primarily to convert oil and gas into dividends, and the company already pays out about 30% of its earnings as dividends - which isn't all that much, really.
Apache (NYSE:APA), though, is a company that investors might want to watch for outsized dividend payout growth potential. Apache is led by a savvy and conservative management team that has a knack for wringing more oil and gas (and doing so more profitability) than most of its rivals. That capability should fuel better than the current 7% payout, particularly after a wave of transactions that have meaningfully expanded the company's production base.
Two More Possibilities
Two other ideas to consider for future dividend potential are reinsurance company Arch Capital (Nasdaq:ACGL) and Microsoft (Nasdaq:MSFT). Arch Capital presently pays no dividend, but this company is one of the best capital allocators in the business. With prices on the way up in reinsurance, Arch Capital may find itself with more capital than it can prudently deploy in the field - capital that could be returned through a special dividend, a regular dividend, or a large buyback.
With Microsoft, the key is to ignore the doubters, haters and skeptics and appreciate Microsoft for what it is. Granted, the PC market isn't what it used to be and the rise of cloud computing, smartphones and tablets are threats. That said, Microsoft is still deeply embedded in thousands of companies and not easily replaced. Microsoft will most likely never grow again in a way that matches what Apple (Nasdaq:AAPL) or VMware (NYSE:VMW) are presently doing, but older tech companies like IBM (NYSE:IBM) have shown that there is life after growth in the tech space.
The Bottom Line
For investors who rely upon dividend-paying stocks as a meaningful source of spendable income, it is not a great idea to make big bets on what companies might do with their dividend policies. That said, it is always worthwhile to spare a few moments pondering where companies and industries are heading and the potential ramifications for your portfolio. Though none of the names on this list may be compelling dividend options today, income investors of the future may regard them as key and core holdings. (For more, see The Power Of Dividend Growth.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
Stock AnalysisThese three stocks are resilient, fundamentally sound and also pay generous dividends.
Investing NewsAre stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
Investing NewsHere are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
Investing NewsHere are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
Stock AnalysisIf you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
Mutual Funds & ETFsExplore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
Stock AnalysisExamine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
Stock AnalysisExamine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
Mutual Funds & ETFsLearn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
Investing NewsWill Ferrari's shares move fast off the line only to sputter later?
The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>