Just in case you thought that stocks were getting back on track in February, yesterday's sharp correction in the S&P 500 provided a big reminder that it's important not to get too comfortable in this market environment.

All told, the last year has been a pretty rough time to be an investor: on a price basis, the big S&P 500 has lost about 5.75% over the last 12 months.

But while capital gains have been nonexistent, companies have been quietly ratcheting up their dividend payouts. Since this time last year, the total dividend payout in the S&P 500 is up 9.3%. And, unlike the rest of the market, the dividend-focused S&P 500 Dividend Aristocrats Index is actually up slightly in the last year.

Those are a pair of very good reasons to keep a closer eye on dividend payouts as markets continue to test investors' patience. Here's another: according to research from Morgan Stanley, dividends have contributed more than 41% of the stock market's total returns over the last eight decades. But, to find the biggest benefit from dividends, it's not enough to simply buy names with big payouts today -- you've got to think about which names are going to be paying more tomorrow too.

So instead of chasing yield, we'll try to step in front of the next round of stock payout hikes.

For our purposes, that "crystal ball" is composed of a few factors: namely a solid balance sheet, 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 to shareholders. And they've helped us grab onto dividend hikes with a high success rate in the past.

Without further ado, here's a look at four big stocks that could be about to increase their dividend payments in the next quarter. Think of it as your dividend preview.


Up first on our list of potential dividend hikers is $91 billion diversified industrial company 3M (MMM) . 3M has been holding its own in 2016. While the rest of the broad market is down almost 8% so far this year, 3M has shed less than two percent of its starting share price. Sometimes, it's the little things that matter.

Less little is 3M's dividend payout. At $1.025 per share each quarter, 3M's dividend adds up to a 2.8% yield at current levels.

In other words, even if 3M failed to move another basis point higher for the rest of the year, this stock would still end 2016 in the black thanks to those dividends. And management looks poised to announce a dividend hike this month…

3M is the company behind household name products like Scotch tape, Post-it Notes, and Ace Bandages. But 3M makes most of its money outside of the consumer space, through product lines that include respirators, industrial adhesives, and heavy-duty filters. Almost half of 3M's product lineup is made up on consumables, a fact that gives the company a deep stream of recurring revenues. The fact that the firm's product portfolio is technology-driven means that it's less sensitive to encroachment from off-brand competition.

From a financial standpoint, 3M is in good shape. The firm's balance sheet carries a very manageable $10.8 billion in debt, and that's largely offset by a $2 billion cash position. Likewise, 3M has a long history of returning capital to shareholders, with almost a century of uninterrupted dividend payments. After four straight quarters of the same payout, investors should be on the lookout for a raise in February.

Morgan Stanley

It's been a tough year for shares of legacy investment bank Morgan Stanley  (MS) . Like the rest of the financial sector, this stock has gotten pummeled in 2016, down more than 20% since the calendar flipped to January. But much of that underperformance may be undeserved. Morgan Stanley's fundamentals look out of synch from its share price. And management looks likely to broadcast that message this quarter with a dividend hike.

Morgan Stanley is a diversified financial firm, with businesses ranging from securities trading to wealth management to traditional investment banking. The firm's larger-than-average exposure to the wealth management business, and smaller-than-average exposure to trading (a business line that's been haranguing other large financials in recent quarters) gives Morgan Stanley better positioning than most. Size matters in the investment business, and Morgan Stanley's huge scale and reputation give it the ability to attract enough capital to keep costs low as a proportion of AUM.

While high-profile IPOs have been few and far between lately, that's not uncommon in environments where equity prices are under pressure. At the same time, overall M&A activity has actually been on the rise in the U.S. versus this time last year, keeping investment banking revenues buoyant despite the market rout. Currently, Morgan Stanley pays a 15-cent quarterly dividend check that adds up to a 2.45% yield. Investors should look out for a raise in the quarter ahead.

Costco Wholesale

Despite tough retail conditions, Costco Wholesale  (COST)  has managed to keep up its growth trajectory, reporting more than $116 billion in revenues over the trailing four quarters. The secret to Costco's success? It doesn't actually make a profit selling merchandise.

Unlike most retailers, this big box store chain earns the vast majority of its profits through membership dues, an extra high-margin revenue stream that enables Costco to sell its merchandise very close to cost. Only Costco's 80 million paid-up members get to shop at the firm's 686 worldwide locations. At the same time, the membership model gives Costco an extremely sticky membership base that's got a sunk cost in shopping at its stores.

Financially, Costco is in excellent shape with zero net debt. That lack of balance sheet leverage puts Costco in a good position to ramp up payouts to shareholders in 2016. The firm has been paying out a 40-cent dividend check for the past four quarters, and if history is any indication, a dividend hike looks likely to happen in the coming quarter.


Mattel  (MAT)  had a standout day yesterday. With a 13.8% rally in shares following fourth-quarter earnings results, Mattel managed to end Tuesday's session as the second-best performer in the entire S&P 500. Excluding one-time items, Mattel earned a profit of 63 cents per share, coming in just above the 60.9-cent profit that Wall Street was looking for. Even better, management outlined a plan for growth in the years ahead. And bigger profits should translate into bigger dividends for investors in 2016.

Mattel is one of the biggest toy companies today, with a valuable portfolio of brands that includes Barbie, Fisher-Price and Hot Wheels. Size matters in the toy business. Because of Mattel's large scale, it's able to secure lucrative licensing and tie-in deals with entertainment companies, helping it move products that smaller companies can't. While competition is fierce in the toy business, Mattel's large exposure to company-owned brands helps to offset some of the major risks of primarily being a licensee.

Historically, Mattel has been an excellent provider of shareholder yield, handing billions of dollars to shareholders in the form of dividends. Right now, Mattel's yield is a hefty 5% payout, but the company could be cutting even bigger checks to investors later on in 2016, following yesterday's announcement of its ninth consecutive quarterly payout of 38 cents per share.

Discover Financial Services

Last up on our list of potential dividend hikers is Discover Financial Services  (DFS) . Discover is a banking company that operates its own set of closed-loop card networks, from the eponymous Discover brand to PULSE and Diners Club. Discover is both the card issuer and the network for the majority of cards it issues, but it's gone the way of larger closed-loop peer American Express  (AXP)  in recent years, opening up the network to third-party banks.

The last few years have also put a major focus on consumer banking, a business that not only provides a cheap source of deposits but also generates attractive, low-risk returns and leverages the scale of Discover's existing risk management capabilities. While Discover's number-four positioning doesn't give it much of an economic moat, the firm's willingness to embrace new technology and pay higher rewards spending rates towards customers both incentivize consumers to reach for the Discover card when making a payment.

The potential for rising interest rates bode well for Discover's large, well-underwritten and generally variable rate loan book. Higher rates mean that Discover can earn higher margins on the dollars it lends out. For the last few years, Discover has been a consistent dividend hiker, and after four straight quarters of keeping its payout at 28 cents, the firm looks likely to give shareholders a raise in the coming quarter. Stay tuned.


Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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