Zacks
Zacks Investment Ideas feature highlights: General Motors, Baxter International, Church & Dwight, Microsoft and Wal-Mart Stores
Zacks Equity Research

For Immediate Release

Chicago, IL –March 26, 2013 – Today, Zacks Investment Ideas feature highlights Features: General Motors (GM), Baxter International (BAX), Church & Dwight Company (CHD), Microsoft Corporation (MSFT) and Wal-Mart Stores (WMT).

4 Stocks with Rapidly Growing Dividends

With interest rates stuck near record lows for the foreseeable future, more and more investors are looking at dividend stocks for income.

But beware the siren call of high-yielding stocks.

A high single-digit or low double-digit yield may look attractive at first glance, but yields that fat are rarely sustainable. Keep in mind that equity investors take a back seat to bondholders and preferred stockholders in the capital structure hierarchy. So that dividend check is no guarantee.

If times get tough and a company becomes strapped for cash, checks to bondholders will get sent out before that dividend check. That's why it's not uncommon to see high-yielding stocks slash or suspend their dividends during economic slowdowns. One only needs to look at investors who picked up shares of General Motors (GM) or any of the "stable" bank stocks back in 2008 because of their alluring yields to realize that juicy dividends often don't last.

Think Long-Term

If you plan on holding onto a stock for a while, it's important to not only look at its current yield, but consider its dividend growth potential too. There are several metrics to consider when determining a company's dividend growth potential.

One of the best measures is the payout ratio. The payout ratio is simply the percentage of net income a company pays out to shareholders in dividends:

Dividends / Net Income

Even better - go to the company's statement of cash flows and look at the percentage of dividends paid to its free cash flow, which is just cash from operations less capital expenditures.

Knowing a company's dividend payout ratio is vital. Typically the higher the payout ratio, the less room a company has to raise its dividend in the future. And if a company becomes distressed, a high payout ratio can signal a significant cut is on the way.

A company with a relatively low ratio of dividends to free cash flow, on the other hand, may just have some big dividend hikes on the horizon. This is typical of a younger, fast-growing company, assuming it even pays a dividend at all. As the company grows and matures, however, it will have less growth opportunities and will usually plow back less cash into the company and more into your wallet.

That means a decent dividend yield today could become a huge yield in the future. For instance, a company that raises its dividend an average of 12% per year will double its dividend every 6 years. And at 18%, it will double every 4 years.

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