The Next Dividend Growth Stock

| August 23, 2011 | 0 Comments

I love when history repeats itself…

It doesn’t happen very often.  But every once in a while, the market gives you a chance to turn back the clock to take advantage of a great opportunity.

Let me explain…

Last week, Hewlett-Packard (HPQ) CEO Leo Apotheker announced that HPQ will spin off its market-leading PC portfolio within the next year and a half.  And they’re pulling out of their webOS-based tablets and smartphones venture.

But HPQ didn’t stop there.  They also announced that they were buying the UK based Autonomy (LON: AU) for $10 billion to bolster their enterprise software business.

In other words, HPQ is pulling out of the consumer market and re-focusing on the business market.  (I guess competing against Apple (AAPL) and Google (GOOG) was too much for them…)

The move will enable HPQ to focus more time and money on higher-margin commercial systems, software, and business services like cloud computing.

Right off the bat, investors don’t like the idea.

The stock is down about 20% from $30 to $24 since HPQ announced their plans.

It’s like déjà vu…

This move by HPQ sounds just like the one International Business Machines (IBM) made in 2005.  Back then, Big Blue spun off their PC business to Lenovo (LNVGY) so they could focus on higher-margin business services.

At the time, investors didn’t immediately like the idea of IBM shedding its PC business.  The stock fell nearly 25% from $99 into the mid-$70s.

But since then, IBM’s higher margin business has been great for investors.

Since 2005, the stock has skyrocketed from $72.50 to a recent high of more than $185.  That’s an impressive 155% return.

But that’s not all…

IBM has also been one of the best dividend growth stocks.  They’ve consistently raised dividends every year since they spun off the dead weight of their PC business.

In 2005, IBM paid a quarterly dividend of 20 cents per share.  With a stock price in the mid-$80s, that’s a dividend yield of about 1%.

Today, IBM pays a quarterly dividend of 75 cents per share and boasts a 1.89% dividend yield.  Over the last six year, they’ve increased their dividend by a whopping 275%.  And last year alone, IBM raised their dividend 15%.

So, the question is… Would you invest in IBM after they announced the spinoff of their PC business in 2005?  I know I would!

Consider this…

HPQ hadn’t raised their dividend since 1998.  For the last 13 years, they had paid a quarterly dividend of 8 cents per share.  Then, out of the blue, HPQ raised their quarterly dividend by 50% to 12 cents per share.

It’s clear to me that HPQ is gearing up to take the same path of dividend growth as IBM did in 2005.  We could easily see HPQ shares double and their dividend skyrocket over the next five years.

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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