This business not only operates in separate divisions within alcoholic beverages (wine, spirits, beer), but it holds multiple brands in each space. The companies brand portfolio holds three well known vodkas–Ciroc, Kettle One, and Smirnoff–in three separate vodka categories (ultra-premium, super premium, and premium). What makes this so wonderful for investors is that Diageo plc (ADR) (NYSE:DEO) is dominating the adult beverage landscape at every level. No matter what type of beverage a customer wants they’re likely to choose a Diageo plc (ADR) (NYSE:DEO) brand, and that’s lead to an industry leading return on equity (44% vs. an industry average of 27%).
Analysts’ consensus expectations are for earnings at Diageo plc (ADR) (NYSE:DEO) to grow from $5.92 last year to $8.32 by 2015. If that happens, you could see a price increase of more than $40, from today’s price, within two years (based on a historic P/E multiple). You can also expect, with such a low pay-out ratio, that the dividend will rise. The total return (dividends and capital gains) should be quite respectable for Diageo plc (ADR) (NYSE:DEO).
Dividends in the lab
Some investors may look at Baxter International Inc. (NYSE:BAX), a healthcare company, and fear changes from upcoming healthcare reforms but I wouldn’t. Considering this business supplies healthcare professionals and isn’t subject to insurance oversight or review, it should be safe. If anything, the influx of many (previously uninsured) new customers might benefit Baxter International Inc. (NYSE:BAX).
Like General Mills, Baxter International Inc. (NYSE:BAX) regularly increases its dividend. The company has increased its dividend eight times since 2007, now that’s amazing! Dividend increases almost always lead stock prices higher; simply put, we want stocks that have increased dividends before and will do it again!
I fully believe that Baxter International Inc. (NYSE:BAX) will have the earnings growth to keep its dividend marching upward. Earnings have grown consistently at about 9% while cash flows, and cash on the balance sheet, have grown significantly each of the last three years as well. A low pay-out ratio, growing earnings, and increased cash flows usually lead to dividend increases.
Dividends everywhere!
You can find dividends everywhere, but they’re not all created equal. Dividend paying stocks with low pay-out ratios, and growth catalysts, are more likely to increase their dividend payment going forward.
If interest rates do continue to rise, and bond values decrease, the dividend payers that meet these criteria will offer the best income alternative. They should see increased dividend payments and stable, if not spectacular, stock appreciation.
Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends Diageo plc (NYSE:DEO) (ADR). Adem is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 3 Dividend Stock Picks for Your Portfolio originally appeared on Fool.com is written by Adem Tahiri.
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