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In an Aug. 31, 2011 photo people examine John Deere farming equipment on display during the Farm Progress Show in Decatur, Ill. (Seth Perlman/AP)

In an Aug. 31, 2011 photo people examine John Deere farming equipment on display during the Farm Progress Show in Decatur, Ill.

(Seth Perlman/AP)

5 dividend hikes to watch for this earnings season Add to ...

It’s earnings season, and that means that good times are here again for income investors.

The past couple of months have been a tumultuous time to be an income investor. The biggest challenge came from the fiscal cliff debacle, which threatened to smash real income returns with a dramatic increase in tax rates on dividend income. A last-minute agreement spared investors of that threat for 2013 – even if dividend rates increased for the top 2 per cent of earners, it beats what would have happened had the old tax laws just expired.

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Now earnings season is offering up some extra upside.

Traditionally earnings season and dividends go hand in hand; when firms announce how much money they’re making, they also typically announce how much they’re paying shareholders. And just like positive earnings numbers can spark buying in shares, so too can a big dividend boost. But it’s not enough to just react to the dividend hikes – you’ve got to step in front of them if you want to capture the biggest gains. That’s why we’re looking at a handful of stocks that could be getting ready for a dividend boost this 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 the New Year.

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

Apple

We’ll start from the top – with Apple Inc., the biggest publicly traded company in the world. Apple made waves in March, when the firm announced that it would be initiating a $2.65 (U.S.) dividend payout – the first dividend from Apple since the mid-1990s. But with Apple sitting on a mountain of cash, the move made more sense than most other uses of the firm’s bank account. Even though this stock has been under pressure for the past few months, there’s still reason to believe in shares of AAPL right now.

Apple enjoys stellar positioning in the electronic device market. Its iPhone, iPad and iPod lines remain massively popular, its online media distribution arm ranks as the biggest in the world, and it’s literally the only PC maker that’s able to command premium pricing in this market. By integrating its mobile platform across all devices, the firm makes customers much more likely to stick with the iOS universe than switch to other offerings that don’t have the same compatibility. That’s also contributed to the “Halo effect” that’s spurred iPhone and iPod adopters to buy Macintosh computers.

The demand for Apple’s products right now means that the firm enjoys bigger margins than most other handset makers, and while that’s not guaranteed to last forever, Apple is going to be hard to dethrone.

From a financial standpoint, Apple remains in stellar shape. The firm boasts $121-billion in cash and investments, giving it ample wherewithal to keep emphasizing shareholder yield through buybacks and dividends. So far, Apple has managed to avoid the tech sector’s favourite misstep of overpaying for big acquisition targets, an easy trap to fall into for firms with more cash than options. Corporate culture has a lot to do with that, and Apple remains the cash-rich firm that poses least stewardship risk in the sector.

Instead, it looks likely to Apple to use that cash on a dividend hike in 2013. Until then, the firm pays a $2.65 dividend for a 2.02-per-cent yield. Keep an eye on January 23 earnings.

Deere

Already, 2013 is shaping up to be a good year for shares of Deere & Co. – the $34-billion agricultural and construction equipment manufacturer has already seen its share price rally by 4 per cent and change. That’s almost half of the performance this stock saw in the entire last year.

A dividend hike could help to add onto those returns; right now, Deere pays a 46-cent quarterly dividend for a 2.05-per-cent yield.

Deere’s brand is a big asset. It’s the only combine maker I’m aware of that gets away with selling apparel to suburbanites – and more important, that brand strength carries over to its core market too. Deere has built a reputation for quality and technology, pioneering features like GPS marking of fields in its equipment. That helps Deere command higher prices than peers while still actually moving equipment. And there’s no question that Deere does, in fact, move equipment; the firm owns more than 50 per cent of the North American ag market.

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