Nearly every stock in the S&P 500 is paying a dividend these days – roughly 84% by my last count. But that still doesn’t guarantee success when it comes to dividend investing.
Investing in a company that has the resiliency and capability to keep paying investors more, year after year, can have a more profound impact on your portfolio than a high-yielding stock that doesn’t have the flexibility to up its dividend.
I’ve found two dividend stocks this week upping their quarterly dividends by 25%. Both have strong growth tailwinds thanks to the rise of cloud computing, but they are also underrated because of their “low” dividend yields.
However, the fact that they have strong cash flow and rock solid balance sheets means they are both likely in the early innings of a longer-term dividend growth story.
First up is Western Digital Corp (NASDAQ: WDC).
Western Digital is a maker of hard disk drives for computers. Not a sexy business, but it pays well enough for the company to up its dividend 25% this week to 50 cents a share. Its dividend yield is 2.2% and it’s only paying out 24% of its earnings via dividends.
This also marks the second year in a row that it has upped its annual dividend. Its current dividend is now twice as much as when it started paying a dividend in 2012.
Granted, the stock doesn’t get much respect because it makes hard drives for computers, which have been losing market share to tablets. However, Western Digital still generates a lot of cash from hard drive sales, given that it is the market share leader in the U.S. It commands just under 50% of the hard drive market.
Yet the PC market is stabilizing and Western Digital is making an impressive transition into solid state drives, which gives it exposure to the cloud computing market, as well as the tablet market. One of Western Digital’s key focuses is on making cloud services more efficient (i.e., decreasing power usage while increasing storage capacity).
But don’t forget that Western Digital has enough cash to cover its debt two times over. Shares trade ex-dividend March 31.
The next stock on our list is Oracle Corporation (NYSE: ORCL).
Oracle is upping its quarterly dividend 25% this week to 15 cents a share. This will put its dividend yield to 1.4% and it, too, has a low payout ratio. It pays out just 22% of its earnings via dividends.
The tech company now has three years of consecutive annual dividend increases. Its upcoming 15 cents a share quarterly dividend will be more than 2.5 times what its quarterly dividend was just three years ago.
Its balance sheet is strong, and despite the fact that its 1.4% dividend yield appears low, Oracle has been committed to returning cash to shareholders. In the last year alone, it’s bought over $8 billion of its own stock and paid over $2 billion in dividends, which means it’s been returning more than 70% of its cash flows to shareholders.
As far as its business, Oracle is an enterprise technology company, known for its database management software. Driving future growth will be the rise of Big Data and greater demand for digitalization – namely, cloud computing. Oracle has already been active in terms of tackling the cloud market by partnering with the likes of Box (NYSE: BOX), Salesforce.com (NYSE: CRM) and NetSuite (NYSE: N).
With its future growth opportunities and over $10 a share in cash on its balance sheet (versus its $43 stock price) look for more dividend increases and buybacks in the future.
Shares trade ex-dividend April 2.
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