Now is the best time to roll out our favorite dividend “hack.” It’s a sneaky-smart strategy that lets us “time” the market for soaring dividend payouts (and a steady drip of price gains, too).

Our plan consists of two simple steps, which we’ll look at now. Then I’ll name two stocks that are perfect for this strategy. Both look set to roll out big dividend hikes soon.

Step 1: Buy Just as a Payout Hike Is Announced

We’ll start by “timing” our buys just as dividend hikes are announced. That’s a veteran move because a company’s stock almost always rises with its payouts—a predictable pattern I call the Dividend Magnet.

And there’s often a lag between when a hike is declared and a rise in the stock. That’s our time to pounce.

You can see this “set-your-watch-to-it pattern” in shares of drug distributor AmeriSource Bergen (ABC), a holding of my Hidden Yields service. ABC has delivered 62% returns since we bought in June 2020. Look at the chart below. The lag between the rise in the dividend and the share-price jump is crystal clear. That’s our window:

ABC’s Dividend Telegraphs Its Next Price Move

This is Step 1 of our dividend-and-price-gain tango—buy shares of reliable dividend growers just before they announce hikes. And because management loves to reward investors near year-end and into the new year, we have many to pick from. We’ll look at two specific year-end dividend raisers below.

We’re also nicely set up to profit as we enter three of the best months on the stock market.

According to the Stock Trader’s Almanac, November and December are the two top months for stock performance, with average gains of 1.5% and 1.6%, respectively, during the Almanac’s study period of 1950 to 2017. January is strong, too, with a 1% gain, tying it for fourth spot.

Step 2: Add a Low Payout Ratio for the Strongest Dividend (and Price) Gains

So we’ve got a predictable dividend-hike pattern and seasonality working for us so far. (Not to mention the fact that markets tend to soar in the 12 months after the midterms, which I outlined in a November 8 article.)

Next we’re going to double our chance of big payout hikes by picking up stocks with reasonable payout ratios. That’s the percentage of free cash flow (FCF)—the best snapshot of the cash a company is generating—that’s devoted to dividends. When it comes to dividend safety, I demand a ratio below 50%. The lower, the better.

Now let’s dive into two names that tick our boxes, with a strong chance of announcing big dividend hikes in the next few months, plus the financial strength to double (or more!) their payouts in short order.

A Canadian Bank That’s Due for a Big “Catch-Up” Dividend Hike

US investors tend to ignore Canada’s banks, and I’ve always wondered why. For one, they tend to yield more than their American cousins. Take Toronto Dominion Bank (TD), which yields 4% now, compared to 3% for JPMorgan Chase & Co. (JPM) and 2.5% for Wells Fargo (WFC).

TD is Canada’s most “Americanized” bank, with roughly the same number of branches south of the border as in its homeland (around 1,100 in each country).

The bank’s Canadian and US businesses are posting higher profits from a year ago, even as the 2022 market mess weighs on trading commissions. Management can thank higher revenue from its credit-card and insurance and businesses for that.

TD is also profiting from rising interest rates, as the yields on the 10-year Treasury note (and Canada’s 5-year government bond) have soared. Those yields, of course, dictate the bank’s rates on mortgages, lines of credit and other loans.

Given the bank’s long dividend history (it’s been paying dividends since 1857) and strong business performance, we can expect it to announce a hike in December, when it usually declares the next year’s dividend rate.

In late 2021, TD rolled out a 13% hike as the Canadian government allowed banks to resume payouts as COVID ebbed. I don’t expect a hike that big this time, but TD will still likely announce a healthy increase as it looks to make up for lost time.

CVX Will Likely Top Last Year’s Dividend Hike

Another company likely to drop a big payout hike this winter is Chevron (CVX), which yields 3.1%. CVX produces oil in the Gulf of Mexico, off the coast of Australia and Africa and in US and Canadian shale regions. It also has refineries in Thailand, Singapore and the US.

The likely timing of the next dividend announcement—in February—is one reason to start building a position now. Another is the fact that oil’s pullback simply can’t last. For one, China is cutting its COVID restrictions, boosting demand while supply remains tight.

Then there’s the US Strategic Petroleum Reserve, which the Biden administration has been draining in a bid to keep prices down.

The SPR Well: Far From Bottomless

Those drawdowns will have to stop at some point, and those barrels will need to be replaced. All of this stands to lift oil prices.

Meantime, Chevron earned $17.58 a share in the last 12 months, giving it a P/E (price-to-earnings) ratio just over 10. There’s nothing else to say here except that this is a dirt-cheap growth stock.

Quarterly revenue is up 49% year-over-year. EPS is up 81%. Yet the stock still yields 3.1% and trades impossibly cheap. And the payout occupies just 29% of free cash flow—a percentage that’s shrinking as FCF rises. With that in mind, plus more upside likely for crude, I expect CVX to drop a hike that tops last year’s 6% raise. Look for that in early February—but you don’t need to wait till then to start scooping up shares.

— Brett Owens

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Source: Contrarian Outlook