Making good investment decisions doesn´t need to be too complicated. On the contrary, sometimes the best alternatives are the most simple and straightforward. The following three industry leaders have rock solid competitive positions, nice dividend yields, and more than enough resources to continue raising their payments in the long term. You don´t need a degree in rocket science to tell that they are positioned to deliver solid returns for investors over the next few years.
Among the big US banks, Wells Fargo & Co (NYSE:WFC) stands out as the best of breed when it comes to risk management and financial soundness. While competitors like Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) made terrible mistakes by loading their balance sheets with toxic assets and complex derivatives during the credit bubble, Wells Fargo & Co (NYSE:WFC) kept doing what it does best: lending money to deserving clients.
The rest is history, the bubble exploded, and companies like Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) had to spend several years cleaning up their balance sheets and streamlining their operations. Wells Fargo & Co (NYSE:WFC), on the other hand, seized the opportunity and capitalized its financial strength to make strategic acquisitions like the opportunistic purchase of Wachovia back in 2008.
Superior risk management has translated into market share gains for Wells Fargo & Co (NYSE:WFC), and the bank is now positioned as the undisputed leader in the US mortgage business. Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) have reduced their mortgage businesses to a shadow of their former selves, and Wells Fargo & Co (NYSE:WFC) was the main beneficiary from this upheaval in the US banking industry.
According to data from Inside Mortgage Finance, Wells Fargo & Co (NYSE:WFC) had a market share of 27.7% in US mortgage originations during 2012, while former industry leader Bank of America Corp (NYSE:BAC) is down to only 4.1%, and Citigroup Inc (NYSE:C) now accounts for a tiny 3.4% of the market.
Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) have come a long way in terms of improving the quality of their assets, and they are ready to focus on regaining some of the lost market share over the next years. But they are still way behind Wells Fargo when it comes to profitability, while Wells Fargo has a return on equity – ROE – ratio of 13.5%, Bank of America Corp (NYSE:BAC) has a much lower ROE around 1.6% and Citigroup Inc (NYSE:C) carries a ROE ratio on the area of 4.5%.
There is still plenty of room for growth in the US mortgage market as the real estate sector continues recovering over the next years, and no company is in a better position to profit from that business than Wells Fargo. The bank is currently yielding 3.2% in dividends, and the payout ratio is only 26% of earnings, so this banking leader should provide considerable dividend increases over the next years.
Speeding up
The auto industry is tough and very competitive; sales are cyclical, profit margins are usually thin, and capital spending requirements are above average, that´s why you don´t usually find big dividend yields among automakers. This makes Ford Motor Company (NYSE:F) a remarkable exception in tits industry: the iconic automaker pays a dividend yield of 2.9% and the payout ratio is particularly low at only 17% of earnings.
The F-Series is Ford Motor Company (NYSE:F)’s biggest and most profitable product, it has been America´s bestselling car for 36 consecutive years, and there is no slowdown in sight for this product. April sales were 24% higher versus the same month in 2012, and year-to-date data is showing a 19.1% increase in comparison to last year.
As if that weren’t enough, Ford has been gaining market share in other segments of the market: Vehicles like the Escape and the Fusion have been doing especially well lately, with sales increasing by a 52% and 23.7% respectively in the month of April versus the same period in 2012.
The company is benefiting from its dominant position in the profitable trucks segment, while at the same time it´s expanding into other categories thanks to its successful new products. Fasten your seatbelt and keep your hands on the wheel, because Ford is running at full speed.
Connecting dividends
Cisco Systems, Inc. (NASDAQ:CSCO) is the global market leader in data networking and equipment, a business with exciting growth prospects since it benefits from growing internet usage via two powerful venues: More people are gaining internet access on a global scale, and activities like videoconferencing, web-based collaboration, and data centers are increasingly demanding when it comes to connectivity needs.
The company is facing tough competition from Asian manufacturers like Huawei in the low end segment of the routing and switching business, but Cisco Systems, Inc. (NASDAQ:CSCO) has a superior brand presence and the technological prowess to continue growing as the quality leader in its industry. Besides, the company has expanded into services and software with high value added, and this bodes well not only in terms of sales growth but also when it comes to profit margins.
Cisco pays a dividend yield of 2.8%, and investors have good reasons to expect growing distributions form the company over the next years. The payout ratio is only 25% of earnings, and the balance sheet has a net cash position – more cash than debt – so it sounds only reasonable to expect growing dividends from this connectivity powerhouse.
Bottom Line
Dividends are a nice thing to have, and when there are supported by rock solid competitive advantages and unquestionable financial strength, they are even better, because they are likely to grow over time. These three companies provide not only attractive dividend yields, but also strong prospects for dividend growth over the next years.
The article 3 Industry Leaders With Strong Dividend Growth Prospects originally appeared on Fool.com.
Andrés Cardenal owns shares of Bank of America. The Motley Fool recommends Cisco Systems, Ford, and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , Ford, and Wells Fargo.
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