5 Dividend Stocks With Some Extra Kick

Barrons has a very good article By Johanna Bennett that screens S&P 500 stocks looking for dividend paying stocks that have rising earnings and room to increase their dividend. 5 Dividend Stocks With Some Extra Kick

WITH U.S. FIRMS ROLLING IN dough, the idea of investing in stocks with growing dividends just never grows old.

Seventy-five members of the Standard & Poor's 500 hiked their dividends payments during the first quarter of 2010, a $4.4 billion net increase and a stark contrast to the $39 billion decline during the same period last year.

Corporate America's balance sheets are flush with roughly $3.1 trillion in liquid assets. And with profits rebounding, still more companies could hike dividends in 2010, some quite sizably.

That's good news for investors rebuilding decimated retirement portfolios. But facing the possibility of a large tax hike next year, investors need more than fat dividend checks.

"Dividends matter, but so do capital gains," says Cliff Remily, manager of the Thornburg Investment Income Builder Fund.

To identify a handful of dividend stocks with the potential for decent capital appreciation, Barrons.com came up with a broad list of 80 members of the S&P 500 -- excluding financials -- with the following conditions: dividend yields above 1.8%, rising earnings, and a dividend that was less than 60% of operating profit.

Among the group, Baxter International (BAX), Texas Instruments (TXN), Mattel (MAT), Clorox (CLX) and Becton, Dickinson & Co. (BDX) are poised for generous gains in their share price, as well as robust dividend hikes in 2010.

Shortchanged by last year's stock-market rally, dividend payers typically generate better returns in the later stage of a bull market.

A rising payout signals management's confidence in future prospects.

Howard Silverblatt, S&P's senior index analyst, sees dividend hikes surging in the third quarter. In all, payouts among S&P 500 companies should rise 5.6% this year.

"Companies growing in line with the S&P 500 aren't tremendously exciting, but double-digit dividend and earnings growth is significant," says Jeff Krumpleman, head of the dividend growth investment team at Hilliard Lyons Capital Management.
At a yield of 1.9%, Becton Dickinson has the longest history of dividend hikes -- 37 years. Known for making everyday hospital supplies, Becton's earnings climbed during the recession and should increase 11% annually over the next several years. Over the last 12 months, the stock has lagged gains by the S&P 500. But Don Taylor, manager of the Franklin Rising Dividends Fund, expects the stock to climb 20% over the next 12 months, and sees a 10% to 15% dividend hike this year.

Equally shortchanged by the stock-market rally, Baxter could deliver similar returns. Diverse sales, overseas markets and new products position the medical-product company for sizable growth. That and hopes for a midteens dividend boost and 20% capital gains over the next 12 months, led Barrons.com to write favorably about the stock last month (see Weekday Trader, "Baxter International Has Room to Run," March 3, 2010).

Other dividends could grow much faster. At 3.2%, toy-making giant Mattel last raised its payout in 2007 following a massive recall. Up 88% over the last 12 months, the stock reflects soaring earnings fueled by improving sales of the iconic Barbie doll, cost cuts and a better toy lineup. Still, the share price could climb another 20% in the next year. And Brian Campbell, a portfolio manager with Hilliard Lyons, says he "wouldn't be shocked" to see Mattel's annual dividend payment climb this year from 75 cents a share to almost $1 a share.

At 3.1%, Clorox, the consumer-products giant famed for its iconic laundry bleach, has hiked its dividend every year since 1977. Profit poised to grow in the double digits this year and a fat dividend were touted when Barrons.com wrote bullishly about the shares in February (see Weekday Trader, "A Bright Future for Clorox Shares," Feb. 25, 2010.) Still, the stock trades near a record-low multiple.

And finally, there's semiconductor giant Texas Instruments, which pays a 1.9% yield. The annual cash payment to investors has increased fivefold over the last five years. The balance sheet is rock solid. Profit is poised to grow for the first time since 2007. The company, however, still has "lots of room to raise the dividend without penalizing reinvestment," says Richard Helm, a portfolio manager with Cohen & Steers.

Of course, a long history of increasing dividends doesn't guarantee future hikes.

Nevertheless, at many big companies, dividends -- and dividend hikes -- remain something you can take to the bank.

Disclosure: The Div Guy owns shares of BDX at the time of this post.