4 Dow Stocks Likely to Hike Dividends Soon

In many ways, the Dow Jones Industrial Average is not a very good reflection of the overall stock market. It over-weights companies with higher share prices, not with higher valuations. It also places a lot of emphasis on technology companies and financials while ignoring utilities and basic materials. Furthermore, it contains companies that could hardly be considered “industrials,” such as McDonald’s (NYSE:MCD) and Disney (NYSE:DIS).

But one thing that the Dow is good for is pointing investors toward large, stable companies that are shareholder friendly. Many of the companies in the index don’t just pay dividends but raise their dividends, and investors looking for rising income can find several candidates for their portfolios in this group of 30 stocks.

The following list presents four Dow stocks that regularly raise their dividends and that have paid four quarters’ worth of dividends at the same rate. The implication is that they are set to announce dividend increases in the near future. If these companies do as I expect, especially if they announce substantial increases, then it might be time to get bullish. But if a company fails to announce a dividend increase or if the announced increase is small (e.g., less than 5 percent), then this might be a good reason to consider exiting a position or holding off on buying until the stock falls to a lower price.

1. Caterpillar (NYSE:CAT)

Caterpillar is a leading producer of construction and mining equipment. 2013 was a rough year for Caterpillar, with earnings falling from $5.7 billion in 2012 to $3.8 billion in 2013. Nevertheless, the company raised its dividend in 2013, and despite weakness, the company’s dividend payout ratio (the ratio of the size of the dividend payout to the company’s total income) is small enough so that we can expect a dividend increase announcement fairly soon.

Over the past four quarters, Caterpillar has paid 60 cents per share. Over the past five years, the company has raised its dividend every year, at 9.3 percent per year. Since 2013 was a weak year, I don’t expect the company to raise its dividend at this pace. I expect a 5 percent pay increase to 63 cents per quarter.

2. Chevron (NYSE:CVX)

Chevron is one of the largest oil producing and refining companies in the world. While the company has seen its profits decline somewhat in the past year, this was after a substantial increase in prior years. I expect profits to remain elevated and increase, given that there is strength in the oil market.

In the past four quarters, the company has paid out $1 per quarter, and it has raised its dividend every year – twice in 2011 – in the past five years. During that time period, the dividend has increased at an annualized rate of 10.1 percent. Since last year was a weak year, I expect the dividend increase to be smaller than this. If it is 5 percent, the dividend should increase to $1.05 per share.

3. Exxon Mobil (NYSE:XOM)

Exxon Mobil is in a similar situation as Chevron. It too is a large integrated oil company that has seen its profits decline in the past year. Given the strength in oil and gas prices, I expect profits to be strong going forward. The company has paid 63 cents per share per quarter in the past four quarters. The company has a long track record of raising its dividend on an annual basis, and there is little doubt that the company will disappoint, especially given that it pays a smaller amount of its profits in the form of dividends than Chevron.

Also, because of its aggressive buyback program, it has been reducing the number of shares outstanding, which means that its total quarterly dividend payout has, in fact, shrunk each of the last three quarters. Since it has raised its dividend 10.7 percent per share over the past five years, I think that it will raise its dividend around 6 percent, versus Chevron’s 5 percent, given that it has room to do so, and given that it has bought back a great deal of stock. A 6 percent dividend raise means a new payout of about 67 cents per quarter.

4. UnitedHealth Group (NYSE:UNH)

UnitedHealth Group is a new Dow member; it is also a new dividend payer. For this reason, it pays just a 1.5 percent dividend despite the fact that it trades at 13.5 times earnings. Given that UnitedHealth is a health insurer, we have to be wary of potential issues coming from the recently enacted Affordable Care Act legislation. In the first quarter of 2014, the company showed a reduction in its profits despite a rise in revenue, and so investors and management may be concerned that higher expenses are here to stay.

Nevertheless, the company is still going to raise its dividend. In the past four quarters, it has paid 28 cents per share, although this is up from 13 cents per share just four years ago. This means the company is raising its dividend at 29.1 percent. Given Obamacare-related concerns, I suspect that this rate will come down, but given that the company’s payout ratio is very low (the company earned $1.10 per share last quarter), we can still see a fairly large dividend increase. I expect about 15 percent , which would bring the dividend up to 32 cents per share.

Disclosure: Ben Kramer-Miller is long Chevron and Exxon Mobil.

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