Dividend-paying companies have a few ways of delivering cash to shareholders. They can borrow the money, which increases debt and debt payments. They can issue shares, which dilutes shareholders. Neither of those strategies can be done for long.
The best way is to grow their earnings and cash flow. This allows for companies to pay out a growing amount of that cash flow to the owners of the company – the shareholders. It’s why investors should look for dividend-growing companies.
One company just doubled its dividend thanks to strong earnings growth and rising profit margins. It’s Dick’s Sporting Goods (DKS), a retailer that’s performing well in today’s slowing economy. The company has been working to tighten up its inventory too, which will reduce the need for money-losing clearance sales.
The latest news has helped shares jump 11 percent, and over the past year shares are up 30 percent. But with Dick’s still trading at about 11 times forward earnings, it’s still cheap compared to other retailers and the overall market.
Action to take: With shares now yielding about $4 annually, the stock’s forward yield is about 2.7 percent, up from about 1.4 percent right now. And with a payout ratio still under 50 percent, there’s room for more income growth in the future.
For traders, shares popped higher on the news, and will likely come back down in the coming days. That would be an ideal time to buy the September $180 calls. Last going for about $5.90, traders can look to buy under $5 and ride the longer-term trend higher.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.