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4 Stocks Ready for Big Dividend Hikes in 2013

Stocks in this article: FITWAAPLWLP

With such a comfortable cash balance, Ford could support a dividend of at least 80 cents a share, which would still leave the payout ratio below 50%.

Illinois Tool Works

Industrial conglomerate Illinois Tool Works (ITW) managed to hike its dividend at least 20% in 2006, 2007 and 2008, but in recent years has only boosted the payout at a single-digit clip. As cash flow has risen at a more robust pace, ITW's payout ratio has moved steadily lower. The current $1.52 annual dividend is less than 20% of the $8 a share in EBITDA the company generated in 2012.

ITW's management believes cash flow (and profits) will grow at a mid-teens pace in 2013, and when combined with a modest hike in the payout ratio, could set the stage for this company to return to its tradition of 20+% dividend increases. The current 2.4% yield may not be overly impressive, but a 20% dividend boost would push that yield above 3%.

Management is also rewarding shareholders in another fashion: The company allocated roughly $2.9 billion towards both share repurchases and dividends in 2012 "and expects to complete over $500 million in buybacks in 2013," according to analysts at Citigroup.

The company's ability to keep buying back stock -- and fatten the dividend -- should only strengthen in coming years. ITW is in the midst of a streamlining initiative that is projected to yield $600 million to $800 million in cost savings by 2017. That's money that will find its way towards even greater buybacks and higher dividends.

Apple

Apple's (AAPL) growth is slowing. That's a notion now being digested by the market, as a company that once routinely boosted sales at a 20% or 30% pace may be hard-pressed to boost sales at even a 10% pace in coming years. Still, the company remains remarkably profitable, generating an eye-popping $39 billion in free cash flow in fiscal (September) 2012.

What do companies do when growth slows but cash flow remains prodigious? They start returning money to shareholders. Apple paid $2.65 a share in dividends in fiscal 2012 and is on track to pay that amount every quarter in the current fiscal year. But Apple can do so much better. Simply by retaining $10 billion in free cash flow every year and paying out the other $30 billion in dividends every year, Apple's annual payout would soar to more than $30 a share in every years, equating to a dividend yield in excess of 7% at current prices.

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