5 Dividend Stocks Itching to Pay You More

BALTIMORE ( Stockpickr) -- The dividend clock is ticking. Are you ready for it?

As the so-called fiscal cliff comes closer, one key component of the tax increases set to trigger on January 1 is the treatment of dividend income. This item is set to change after a decade of record-low tax rates for unearned income. Since 2003, we've gotten accustomed to paying Uncle Sam just 15% of our dividend earnings, but barring a deal between the White House and Congress before year-end, that rate jumps up to whatever you pay for regular income.

That change could have a real, negative impact on income investors, a group that's already gotten shellacked in the last several years on the heels of record-low interest rates and comparatively high inflation. As a dividend seeker, you've got to fill that gap somehow; that's why today, we'll focus on finding likely dividend hikes for the coming quarter.

In other words, these five firms are getting ready to boost dividends; they just don't know it yet.

In the past few months, we've had some stellar success in finding future dividend hikes just by zeroing in on a few key factors. Now we'll look at our crystal ball and try to do it again.

For our purposes, that "crystal ball" is composed of a few factors: Namely a solid balance sheet, a low payout ratio, and a history of dividend hikes. While those items don't guarantee dividend announcements in the next month or three, they do dramatically increase the odds that management will hike their cash payouts, especially as investors start to get antsy about this late-2012 correction.

Without further ado, here's a look at five stocks that could be about to increase their dividend payments in the next quarter.

United Parcel Service UPS Chart UPS data by YCharts

First up is international shipping giant United Parcel Service ( UPS), the firm best known for its signature brown delivery trucks. UPS boasts a network of more than 500 planes and 100,000 vehicles that delivers around 16 million packages to customers each day. Currently the firm pays a 57-cent quarterly dividend that adds up to an annual 3.24% yield at current price levels.

UPS has some serious scale advantages. Hundreds of planes, thousands of trucks, and countless hub facilities, drop boxes and retail locations aren't cheap, and replicating the firm's global reach is nearly impossible. The firm operates in a domestic duopoly with FedEx ( FDX), and the empty trucks of fallen rivals (like DHL's foray into U.S. delivery) are a testament to just how tough the delivery business actually is.

Logistics and ground shipping continue to be big growth drivers for UPS this year. With fuel prices getting held down in the latter part of 2012, the firm has been able to churn out respectable net margins -- creating more cash for shareholders to claim. While UPS' balance sheet does carry considerable leverage, it's not out of line with what investors should expect from such a capital-intense industry. With ample cash coverage for its obligations, UPS looks well positioned for a dividend hike in the next quarter.

3M MMM Chart MMM data by YCharts

3M Corporation ( MMM) may be best known for blockbuster products like Scotch Tape and Post-It Notes, but the firm has been working hard to expand its product portfolio in recent years. Other big 3M offerings include products as diverse as industrial adhesives and computer screen security devices -- that wide mix of broad appeal office supplies and higher-ticket niche offerings makes 3M more attractive than its average peer in this market.

To grow its offerings, 3M has been pursuing big acquisitions, deploying some of the $6.5 billion in cash and investments that the firm has on tap. Growth by acquisition is a relatively new approach for 3M, but it shows significant promise for boosting the firm's top line numbers, particularly on this end of the business cycle. Historically, innovation has been one of the biggest keys to 3M's success. More recently, it's also managed to reinvent and modify its most popular products, squeezing extra life out of offerings that have ample competition.

Overseas growth remains a big opportunity for 3M, even though the firm already has exposure abroad. The firm already enjoys deeper margins in emerging markets, and expanding its offerings in regions where it already has distribution channels makes a lot of sense. Financially, 3M's balance sheet is net cash positive, with ample liquidity. That should help pave the way for a dividend hike in the next quarter.

Right now, 3M pays out a 59-cent quarterly dividend for a 2.68% yield.

The Gap GPS Chart GPS data by YCharts

Apparel firm The Gap ( GPS) reported good numbers and an improved outlook in Thursday night's Q3 earnings call, spurring a boost in buying activity this morning. Gap owns a handful of brands in addition to its self-named store chain -- Old Navy, Banana Republic and Athleta are just a few of them. All told, Gap owns more than 3,000 stores in North America, Europe and Japan. The firm franchises another 200 locations in emerging markets like the Middle East and Southeast Asia.

Even though the apparel business is supremely competitive, Gap has done a good job of staying one step ahead of the game. The firm's brand is strong, and it's stayed ahead of consumer fashion tastes by catering to a less volatile demographic: young-to-middle aged professionals whose preferences haven't changed much in the last decade or so. While other brands do step into more fickle consumer groups (like Old Navy's focus on a much younger crowd), the firm approaches those markets cautiously, the same way it's handling international growth.

While Gap owns its domestic stores, the firm opted to franchise its emerging market growth, taking considerable risk off of its balance sheet without precluding the firm from growth opportunities abroad. The firm also took the Great Recession as an opportunity to shore up its finances and restructure -- that's helped shove net margins closer to the double-digit range. Currently the firm pays a 12.5-cent quarterly dividend for a 1.43% yield. That payout looks likely to increase in the next quarter.

Macy's M Chart M data by YCharts

Another retail name on our list this week is Macy's ( M). Despite challenging market conditions coming into play in the last quarter of 2012, Macy's is having a strong year -- shares of the $15 billion retail chain are up close to 23% since the start of the year. Those returns are getting even bigger. With Macy's 20-cent quarterly dividend payout, here's a look at why that 2.03% yield looks likely to increase:

Like other shopping mall anchors, Macy's struggled during the Great Recession as consumers traded down and sales suffered. But Macy's made more efforts to fix its model than most of its peers, improving its localized merchandising efforts and working on driving more traffic into its stores. A major restructuring dramatically reduced the firm's headcount and contributed to a return to profitability in recent years. More recently, the payoff has been incremental increases in same-store sales and margins.

With more than 850 Macy's and Bloomingdale's stores spread throughout the country, Macy's enjoys scale and brand recognition that smaller retailers lack. And its legacy stores in major U.S. cities boast some extremely attractive urban retail locations, like the firm's flagship store in New York City. Lately, management has been prioritizing investors with its dividend, while at the same time boosting shareholder yield by cutting down its debt load. With few other capital needs, that frees up more cash for a dividend hike at Macy's.

Lorillard LO Chart LO data by YCharts

Last up is tobacco firm Lorillard ( LO), the No. 3 cigarette manufacturer in the U.S. News that the FDA was considering regulatory action against menthol cigarettes was a major black cloud for Lorillard, whose mentholated Newport brand contributes around 94% of sales for the firm. While those black clouds have dissipated a bit, investors are still a bit anxious about the potential for downside in LO.

As a sin stock, Lorillard has some considerable advantages. For starters, it boasts a product with sticky customers, recession-resistant sales and deep net margins. It also pays out a generous 5.47% dividend yield right now, as a result.

While the domestic tobacco business is dying a very slow death, Lorillard's category is actually seeing some growth. Mentholated cigarettes have seen their share of the overall market slowly creep higher, offsetting the declining number of smokers in this country (Lorillard sold off the international rights to Newport in the late 1970s, so international growth rates aren't a consideration here.) Because LO owns more than a third of the mentholated cigarette market, it's been benefitting disproportionately from that trend. With a strong balance sheet and excellent cash-flow generation, the firm looks more than capable of offering investors a near-term dividend hike.

To see these dividend plays in action, check out the at Dividend Stocks for the Week portfolio on Stockpickr.

And if you haven't already done so, join Stockpickr today to create your own dividend portfolio.


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At the time of publication, author had no positions in stocks mentioned.

Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet . Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily , and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.

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