By David Goodboy
At StreetAuthority, we believe in the importance of dividend yield and reinvestment as the key to a successful retirement plan.
Dividend reinvestment can mean the difference between a comfortable retirement and a stressful one. Investing in companies with strong records of dividend increases and then reinvesting the proceeds is a surefire way to quickly build your portfolio.
Although more speculative than purchasing the proven dividend producers, I like to look off the beaten track for companies that have recently started paying dividends and have large cash reserves. In addition, the companies that catch my interest are either growing rapidly or are undergoing changes that may enable steady growth and increased dividend payouts over time.
With this in mind, here are two stocks that could soon turn into dividend machines.
Dunkin' Brands Group
This company is famous for its Dunkin' Donuts and Baskin-Robbins franchises. In many areas of the U.S., Dunkin' Donuts rivals Starbucks
) as the top coffee chain.
Founded in the 1950s, the company went public in 2011 at $19 a share. Shares have since doubled to a recent price near $40.
What I like most about Dunkin' Brands is its franchise-expansion method. This expansion tactic relies on the cash infusion of the individual franchisees to fuel growth. This means the company is able to return its excess cash to shareholders in the form a dividend rather than burning it in expansion efforts.
Dunkin' began paying a dividend last year and increased it by 27% in January. The dividend is currently 76 cents a share with a 2% yield. This may seem low, but profits are expected to increase by 15% during the next several years. The dividend is likely to increase along with profits. Technically, the company has been in a steady uptrend since mid-November.
Supported by the 50-day moving average, the stock has just tested support, bouncing higher. This creates a solid technical entry level with a 12-month target price of $43.
True Religion Apparel
If you spend any time at your local mall, you are probably aware of True Religion jeans.
Having a cultlike following befitting its unusual name, True Religion operates 122 U.S. retail stores with a presence in 50 countries on six continents. Founded in 2002, the company has struggled recently to remain relevant in the face of heavy competition.
Last quarter, the company was able to squeeze out a 1.5% increase in comparable sales, but that came after a 4.7% drop in the previous quarter. Founder Jerry Lubell recently stepped down as CEO, providing the company a chance to re-evaluate its strategy.
I like that True Religion is forecasting 20% growth in international revenue and is planning to open 14 new international locations this year. Despite its struggles, the company boasts $200 million in cash and had sales of $467 million last year. This copious cash hoard equals $8.50 per share.
True Religion began paying a quarterly dividend of 2 cents a share in May 2012. If the new CEO can refocus the company on its roots in the moneymaking denim jeans market, and the international expansion turns out as expected, the dividend will have room to grow.
In addition, the company has begun a strategic review that includes a possible sale at up to $37 per share. Technically, the stock has hit resistance at $28. A breakout close above this level and a 12-month target price of $33 makes sense.
Risks to Consider: Even the most solid of companies can suffer from unexpected happenings. Dunkin' Brands is the less risky of the two companies. In contrast, the cultlike following of True Religion, combined with its management changes and possible buyout, makes it a tempting, if speculative, investment. Always use stops and position size properly when investing.
Action to Take: I like Dunkin' Brands as a long-term hold. True Religion is a speculative play, suitable only for risk-embracing investors, but the jeans maker has major upside in terms of growth and dividends.
More from StreetAuthority
David Goodboy does not personally hold positions in any securities mentioned in this article.