Are These The Next Decade’s Dividend Kings?

For a number of companies, especially those that are counted among the S&P Dividend Aristocrats, boosting the dividend is annual ritual. And dividend fever is now spreading, as many companies and industries that would never have thought of offering up a yield in the past are now doing so.

Thanks to a steady economy and more predictable cash flows, you’ll now find dividends popping up in unusual places, and these three firms show the way. A look at their financial statements suggests that they may become among the most robust dividend boosters of the coming decade.

1. Delta Airlines (NYSE: DAL)

The airline industry has been through so many booms and busts that dividends were never even an option. One bad year could erase many years of positive cash flow, and such bad years have often led to bankruptcy. But times have changed.

The world’s top airline carriers have established a predictable market, characterized by stable pricing, full planes, and stronger balance sheets. Back in 2011, I noted that Delta Airlines was establishing an unprecedented level of capital planning prudence, and was poised to rewrite the industry rulebook. Fast-forward to 2014, and Delta has pared debt, eked out efficiencies, and is now on the cusp of solid dividend growth.

Delta dipped its toe in the water in 2013, with a first-ever dividend of $ 0.12 a share. That payout has doubled this year, and by my math, may keep doubling for the next three or four years. That’s because management is committed to keeping capital spending below $ 3 billion a year. That sets the stage for $ 3 billion to $ 4 billion in annual free cash flow in coming years, and when you consider that long-term debt has moved below $ 8 billion (from $ 15 billion in 2010),the balance sheet is already optimized and Delta can allocate an increasing portion of its FCF to the dividend.

Delta currently has around 850 million shares outstanding. That means it has room to eventually hike its dividend to $ 2.50 a share, which would still consume around 60% to 70% of free cash flow. It will likely take Delta three or four years to get there — the company likely wants to see how its free cash flow holds up when the economy slumps — but investors can expect sharply higher payouts with each passing year.

2. SanDisk (Nasdaq: SNDK)

The computer memory industry was also known for booms and busts, but a rapid industry consolidation, led by Micron Technology (NYSE: MU), has ended the cycle of chronic overcapacity. And that has led to a surge in free cash flow for rival SanDisk: The company generated a record $ 1.5 billion in free cash flow in 2013, and that figure is expected to stay at that level through 2016, according to Merrill Lynch.

SanDisk paid out its first dividend last year ($ 0.45), and the payout has already been boosted above $ 1 a share this year. Though Merrill’s analysts expect the dividend to rise to $ 1.50 a share by 2016, the payout could go much higher. Consider that $ 1.5 billion in free cash flow works out to be around $ 6 a share. Doling out just half of that free cash flow towards the dividend suggests the payout will rise to $ 3 a share later in the decade.

3. Ford (NYSE: F)

A look at this automaker’s free cash flow can be deceiving. The company went on a massive capital spending diet in 2009 and 2010, which briefly pushed free cash flow above $ 7 billion each year. Since then, the company has realized the need to sharply boost internal investments in new vehicle platforms and new markets, which has pushed annual free cash flow into the $ 2 billion to $ 3 billion range.

Yet even with capital spending expected to remain relatively high, at around $ 7.5 billion in 2014, 2015 and 2016, operating profits are becoming so robust that free cash flow is expected to rebound sharply. Consensus forecasts suggest $ 4 billion in free cash flow this year, and $ 7 billion to $ 8 billion in 2015 and 2016. Note that Ford has a little less than 4 billion shares outstanding. Applying half of free cash flow to the payout would boost it to $ 1 a share, up from $ 0.50 a share this year.

And even that forecast may prove to be too conservative: Ford currently has around $ 26 billion in cash, and that figure, left unchecked, is expected to surpass $ 40 billion by 2016. At some point, shareholders will be clamoring for Ford to stop building such a huge trove of cash and request that it be returned to shareholders.

Risks to Consider: These companies operate in economically sensitive industries, and any global economic slowdown would lead them to move more slowly with dividend hikes.

Action to Take –> A half-decade ago, it would have been unfathomable to think about these companies paying dividends at all. Now, it’s hard to see how they can avoid paying out sharply higher dividends. The only items that could derail these dividend boosts would be a major acquisition, and none of these companies appear to be contemplating such a move.

High-yielding stocks that have plenty of cash for dividend growth are the foundation for my colleague Amy Calistri’s “Daily Paycheck” investing strategy. To see how she’s used this strategy to earn more than $ 60,000 in dividend checks since 2010, click here.