Stock Quotes in this Article: DGX, EIX, NUE, PCAR, PNW

BALTIMORE (Stockpickr) -- Well, it happened: Ben Bernanke announced recently that the Fed was finally kicking off QE3, sparking a monthly buying spree of $40 billion in mortgage-backed securities that’s expected to go on until further notice.

That open-ended timeline means that Ben’s going to be racking up a huge bill.

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If you’re an income investor though, you should be sweating. After all, this latest round of quantitative easing is going to fuel inflation until the tap gets turned off, and it’s taking place at the same time that Bernanke has promised extraordinarily low interest rates to remain par for the course.

Low interest rates and high inflation means that this is going to continue to be a toxic environment for folks who own income-generating assets.

Let me be clear: Inflation doesn’t even need to be high for the current scenario to smash your income payouts. With the Fed pegging short-term rates near zero, it doesn’t take much inflation at all to gut income investors’ real returns. So fixed-income investors need to focus on a different sort of cash-generation tool in 2012: dividends.

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That’s exactly why we’re scouring the stock market for a new group of big-name stocks that look ready to hike their dividend payouts in the coming quarter. In other words, these five firms are getting ready to boost dividends; they just don't know it yet.

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 rally.

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

Paccar

First up is Paccar (PCAR), the $15 billion truck manufacturer. Paccar’s trucks are built under the well-known Peterbilt, Kenworth and DAF names, garnering the firm a full quarter of the U.S. market and more than 15% of the truck market in the E.U. With a 20-cent quarterly payout currently getting sent to shareholders, PCAR’s yield sits at 1.85% right now. That dividend looks likely to increase in the next quarter.

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Paccar is a pure play on the aging commercial truck fleet, particularly in the U.S. where the role of truck transport is more significant. The firm’s trucks have a reputation for quality that helps to justify a premium pricetag. At the same time, an established dealer network should continue to fuel the company’s growth without the hefty fixed costs involved in owning its own dealer network or the risks of relying on larger corporate dealers who can inflict pricing demands.

While truck manufacturing is unquestionably capital intense, the firm has a stable balance sheet with more than $2.6 billion in cash offsetting a $7.4 billion debt load. With cash generation and profitability looking strong, Paccar should be able to support a heftier dividend payout in 2012.

Edison International

Regulated utilities are traditionally known for their dividend-producing prowess, and Edison International (EIX) is no exception. The California-based company currently pays out a quarterly 32.5-cent dividend check, giving investors a 2.9% yield at current price levels. But I think that there’s room for a bigger payout in Edison in the next quarter.

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Edison owns a regulated utility business in Southern California, as well as a wholesale power generation arm that’s based in the Midwest. That combination means that EIX pays out a somewhat lower dividend than more utility-focused peers, but the generation business adds the possibility for much more significant earnings surprises than a pure-play regulated power company could offer.

Because Edison operates in a geographically attractive region where electricity demand is high and supply is limited, the firm should be able to generate stable growth by building out its infrastructure. The firm currently has enough wherewithal on its balance sheet to finance that sort of capital spending program, and its earnings performance over the last few years already justify a fairly big dividend hike.

Investors looking for power utility exposure should give EIX a second look ahead of its Oct. 29 earnings call.

Nucor

Steel company Nucor (NUE) fits the mold for a consistently high dividend payer: it’s big, it’s boring, and it’s flush with cash. The firm operates steel mills, producing steel as well as construction products like joists, wire and girders. In keeping with its metal-centric business, Nucor is also the country’s largest scrap broker and processor, business that’s become particularly attractive as spot prices for hard commodities continue to creep higher.

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Nucor owns some of the most modern and efficient steel mills in the country, opting to operate many smaller mills instead of several larger mills. That structure has proven that bigger isn’t always better as a steel producer. Nucor can shift its overhead costs to match market conditions, resulting in bigger margins than many traditionally-focused rivals.

An incredibly long track record of profitability is part of the reason why Nucor’s balance sheet looks so attractive right now. That best-in-breed financial position makes Nucor head and shoulders above its nearest peers if the industry sees another unexpected headwind.

Presently, Nucor pays out a 36.5-cent dividend, for a hefty 3.6% yield. Revenues have been climbing steadily since the recession, and are now within reach of pre-crash highs – that’s an impressive feat given the fact that steel demand is still quite a bit off from where it was during the construction boom.

All that cash coming in means that Nucor should be able to pay investors an even higher shrare of the profits in 2012.

Quest Diagnostics

Quest Diagnostics (DGX) has made big business of trivial lab diagnostics like bloodwork and drug tests. The firm’s 2,000 locations make Quest one of the largest medical testing companies in the world, and the recent affirmation of healthcare reform in the U.S. could make the firm even bigger. With more patients insured, the volume of testing that Quest performs is likely to rise in kind.

A changing set of tests should increase profitability as well. The firm has been expanding its offerings to include more complex testing products (such as genetic testing and pathology testing) that have high barriers to entry for physicians’ practices to replicate. As a result, testing margins on those products tend to be more profitable for Quest. While improved physician tools are a nice plus that should help make customers stickier, they’re unlikely to create a material defense against peers. Instead, a rising industry tide is likely to lift all ships in the medical diagnostics field.

To be sure, Quest Diagnostics’ 1.1% dividend yield hardly makes it a core income stock. But a strong balance sheet and improving profitability should lay the path for a hike to its 17-cent quarterly dividend check.

The firm’s Oct. 17 earnings call looks like a good opportunity for management to give investors a raise.

Pinnacle West Capital

Last up today is Pinnacle West Capital (PNW), a $5.9 billion power utility that currently pays out a 3.9% dividend yield. The firm owns the Arizona Public Service company, a regulated utility that provides power to 1.1 million customers. The firm generates around 73% of its power in-house, with 6,340 megawatts of generation capacity.

While Pinnacle’s integrated power generation and distribution cuts out middlemen, the firm has heftier exposure to fossil fuels than most, giving it a black mark. That’s not an environmental concern but a financial one. Fossil fuel prices continue to tick higher, meaning that PNW isn’t truly getting insulation from price swings. That said, the fact that dirt cheap nuclear power is the firm’s number-two source helps to offset some of those downsides.

A recent retail rate increase for PNW has helped the firm solidify net profit margins in the double digits, but investors haven’t seen a dividend increase since 2006. That disparity makes a dividend hike look likely in the near-term.

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



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-- Written by Jonas Elmerraji in Baltimore.


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

Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including

Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.