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Dividends Reward Consistency

Dividend stocks lagged the broader market in 2012, as the iShares Dow Jones Select Dividend Index (DVY) returned just 10.8% last year, compared with a 13.4% gains for the SPDR S&P 500 (SPX). In addition, according to a report from Bespoke Investment Group, the decile of highest-yielding stocks in the S&P 500 fell on average during 2012.

As we approached the fiscal cliff at the end of last year, one concern was that dividend tax rates would rise. This did happen, but raising the maximum dividend tax rate to 20% from 15% was far from the worst-case scenario. As a result, I believe there are attractive buying opportunities in the universe of dividend-paying stocks. Even with income plays, I like to seek out growth; namely, companies that raise their dividends year-in and year-out.

Currently, no one in the market does that better than Diebold (DBD). The maker of automated-teller and voting machines has boosted its dividend 59 consecutive years, and I believe that management will take the streak to 60 years in February.

The company currently pays out $0.285 a share and consistently boosts its payout each February. Diebold's 3.5% dividend yield is toward the high end of the industry range and is nearly twice what the average stock in the S&P 500 offers.

What more important is that Diebold has the earnings power to sustain and increase its dividend. The company is expected to earn $2.40 a share in 2013, which is 2.1x the current annual payout. In general, I look for at least 2x earnings coverage in a secure dividend. Earnings are also on the upswing, with the consensus analyst estimate calling for 6% profit growth in 2013 followed by 9% in 2014.

Finally, Diebold has a stable balance sheet. Management has a reasonable amount of cash on hand relative to its debt and does not face any major bond maturities coming due in the near term.

Investors usually pay a premium for consistency and growth, especially when it comes to dividend stocks. Diebold was recently trading around $32.52 and I believe that shares can move up toward the mid-$30s during 2013. Add in the dividend yield and investors can generate a double-digit total return with relatively less risk than the broader market.

David Peltier is a research associate at TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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