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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.

A big asset for Deere is its captive finance arm. While that scared off some investors in 2008, the quality of Deere’s debt has held up better than most analysts expected – and with access to extremely cheap capital right now, Deere Financial should help stoke the growth fires in a big way going forward. With ample liquidity on hand, Deere looks well positioned for a dividend hike in the next quarter. Investors should watch out for first quarter earnings on Feb. 13.

Waste Management

Aptly named Waste Management Inc. is in the business of turning trash into cash. And it does it in more ways than just one. Yes, the firm’s fleet of trucks collects trash around the country, bringing it to one of 271 active landfills flying the Waste Management flag, but WM also owns considerable waste-to-energy generation capacity thanks to 22 Wheelabrator plants.

Waste Management’s leading market position in the garbage business is attractive. Typically, waste collection is thought of as a recession resistant industry (even if customers produce less waste during downturns, they’re unlikely to stop getting trash services). And WM has a stellar track record of generating cash, leveraging its size to capture national accounts that smaller players in this fragmented space can’t swing. Management has an eye on costs in 2013, as WM looks to expand margins and avoid getting squeezed on its bottom line.

Even though the waste business is capital intense, WM operates with a reasonable amount of leverage when its $1-billion cash and investment holdings are factored in. On the dividend spectrum, waste companies are utility-like, and WM’s 4.07-per-cent yield is evidence of that right now. The firm has the wherewithal to hike its 35.5-cent shareholder payout this quarter, and I think it’s likely to.

Polaris Industries

Polaris Industries had a stellar year in 2012 – in the past 12 months, the ATV, motorcycle, and snowmobile maker has rallied around 50 per cent. As one of the best-known names in the motorsports and small utility vehicle segments, PII has little trouble courting customers who’ve decided they’re in the market for a new toy with treads or nubby tires.

Consumer recreation spending looks well positioned to afford Polaris some attractive organic growth for the next few years. But the firm isn’t waiting for sales increases in the market – it’s been buying complementary brands for its stable, adding names like Indian Motorcycle and more utilitarian offerings such as small electric vehicles used by institutional customers. That combination of market tailwinds and bargain acquisitions should fuel material top line growth in 2013.

Even though the recreational vehicle industry got stomped after the Great Recession, Polaris sports a solid balance sheet. The firm carries more than $470-million in cash and investments, easily offsetting a $107-million debt load. Dividends have historically been a priority for the firm, and a hike to its 37-cent payout looks probable given its balance sheet strength right now. Currently, Polaris yields 1.69 per cent – I think we’ll see that number climb in the next quarter, possibly after Jan. 29 earnings come out.

Nordstrom

Department store chain Nordstrom Inc. is a bellwether for consumer discretionary spending. Its positioning on the higher end of the market means that it thrives when the economy is heating up, and it falters when times get tough. But Nordstrom’s earnings trajectory since 2010 indicates that conditions are improving quickly for the firm.

Nordstrom runs 115 full-price anchor stores, and almost the same number of discounted Nordstrom Rack locations. With a customer base that’s less price sensitive, the firm is able to wring much better margins out of each sale, and as a result it tends to be better situated financially than larger peers. While the U.S. department store market is pretty saturated, JWN’s positioning as the service leader gives it a niche that spares it from a direct comparison to those bigger rivals. For that reason, this retailer still has a lot of room to expand its reach around the country with new store openings. Investors will want to keep an eye on how cautiously management opts to do that.

In the last few years, Nordstrom’s balance sheet has been expanding, but its cash position has been ballooning much faster than its debt load. Right now, cash stands at $1.2-billion, with debt at $3.1-billion. That’s a reasonable amount of leverage for a department store retailer, particularly one that issues its own store credit cards, and the huge amount of cash it generates provides sufficient coverage.

Right now, Nordstrom pays out a 27-cent quarterly dividend that adds up to a 1.97-per-cent yield. With profits on an upward climb, investors should expect those dividends to follow in kind.

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