Stock Quotes in this Article: CAT, CSX, TGT, WMT

BALTIMORE (Stockpickr) -- I know it’s tempting, but don’t make the mistake of ignoring dividends right now.

Yesterday, the Dow Jones Industrial Average and the S&P 500 simultaneously shoved their way to new all-time highs, a fact that’s been slowly luring more and more retail investors to focus exclusively on capital gains. But history shows that eschewing dividends when stocks are rallying can be hazardous to your total returns.

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How hazardous?

According to research from Wharton Professor Jeremy Siegel, reinvested dividends account for as much as 97% of total market performance. Better yet, dividends even impact how big your capital gains are. Over the last 36 years, dividend stocks have outperformed the rest of the S&P 500 by 2.5% annually, and they outperformed nonpayers by nearly 8% every year, all while paying out cash to their shareholders, based on data compiled by Ned Davis Research.

With companies sitting on record corporate cash and profits, it’s going to be crucial to keep looking ahead for the companies most likely to dish out dividend hikes. In the past few months we've had some stellar success in finding future dividend increases just by zeroing in on a few key factors. Now we'll look at our crystal ball and try to do it again.

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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 whether or not 2013’s rally will be able to hang on.

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

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Wal-Mart Stores

There isn’t much that’s exciting about Wal-Mart Stores (WMT). At $470 billion in annual sales, the firm is more of an immovable object than a nimble retail name.

But don’t tell that to investors. Even if the firm’s business isn’t exciting, its price action has been. Shares of WMT have climbed 14% higher since the first trading day in January; that’s an annualized 56% excluding the firm’s 2.4% dividend payout. This coming quarter, the Bentonville, Ark.-based firm looks primed for a dividend hike.

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Wal-Mart is the biggest retailer in the world. On top of its massive sales numbers, the company boasts close to 10,000 store locations spread across the globe, and size bears some pretty serious price advantages for WMT. The firm is aggressive when it negotiates with suppliers, and its built a reputation for winning price concessions that suppliers are willing to put up with in exchange for volume. Those low wholesale prices don’t lead to bigger margins for Wal-Mart, though – they get passed down to customers to keep WMT’s low-price promise. That ability to keep costs low gives Wal-Mart an economic moat.

While WMT’s margins are pretty typical for a big-box retailer, the firm makes up for thin profits by piling on a lot of them. Conventional margins on massive sales led to free cash generation of around $55 billion last year, a number that bodes well for Wal-Mart shareholders. All of that cash generation makes a dividend hike look likely. The firm has held its 47-cent payout constant for the last four quarters, but I’d expect to see a dividend boost in the next quarter.

Target

Wal-Mart’s biggest competitor is another potential dividend hiker for the quarter ahead. Target (TGT) is another big box retailer with big scale, just not as big as the footprint at “Wally World”: Target runs around 1,800 stores spread across North America, and generates more than $73 billion in annual sales. As I write, Target’s dividend yield sits at 2.08%; now the firm looks due for a dividend hike.

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Target has found considerable success in carving out a niche very separate from WMT’s. The firm was one of the first to team up with exclusive designers and market form over cost in a big box setting -- and it’s a strategy that’s paid off in putting the firm slightly more upscale than its biggest rival. In the last few years, the introduction of grocery offerings as a traffic driver (grocery is certainly not a profit driver) has been an effective growth tool. With the firm’s PFresh initiative in place, the firm is likely to see some margin contraction, but it’ll also see bigger profits on an absolute scale.

Financially, Target is in good shape, with plenty of liquidity and untapped credit available on the firm’s balance sheet. That leaves the firm in a good position to hike the 36-cent payout that investors have been receiving for the last four quarters.

Caterpillar

Heavy equipment giant Caterpillar (CAT) has been swimming against the tide for the past few years, working to sell capital-intense equipment in an environment where construction spending is still far from its pre-recession high water mark. But in spite of industry headwinds, CAT has made leaps and bounds in re-shoring itself for the next few years.

One of Caterpillar’s biggest assets is its brand. With its positioning as a reliable, high-end equipment brand, Caterpillar needs to do less convincing than other competitors, and it’s able to compete without having to rely exclusively on price.

The firm’s dealer network is another major asset. Because CAT’s 200 dealers are spread around the world, customers who need time-critical service are able to get their costly machines fixed closer to home. Recovery in the North American construction market is one of the biggest boons for Caterpillar right now, particularly as emerging markets haven’t been quite as quick to recover their breakneck growth (competition is also a stronger force abroad).

CAT hasn’t hiked its dividend in a full year, and with stair-step revenue and profit growth over the past 12 months, a boost looks likely for 2013. Right now, the firm pays out a 52-cent dividend for a 2.4% yield – investors should keep an eye out for a dividend increase announcement in the near-term.

CSX

CSX (CSX) is enjoying some stellar performance this year. Shares of the $25 billion railroad have rallied more than 23% since the calendar flipped over to 2013, besting the broad market’s otherwise impressive performance by more than double. CSX operates a huge rail network, with more than 21,000 miles of track spread across the Eastern U.S. The firm’s main business is shipping coal, chemicals and intermodal containers.

Unlike most transportation firms, rising energy commodity prices are arguably a good thing for CSX. That’s because coal shipments make up close to a third of the firm’s shipping capacity at any given time. And because rail is around four times more efficient per ton-mile than alternatives like trucking, railroad operators are less vulnerable to oil price volatility. That means that a move higher in energy prices wouldn’t be a disaster for CSX (and other railroads, for that matter) like it would be for many of the firm’s transportation sector peers.

Post-recession, CSX has done a good job of improving its efficiency numbers -- and net margins currently weigh in the double-digits. Investors should expect to get a piece of that improved profitability. Right now, the firm pays out a 14-cent dividend for a 2.3% yield; I’d expect those numbers to increase in the next quarter.

W.W. Grainger

Last up is W.W. Grainger (GWW), a $16 billion industrial supply firm that provides more than 2 million businesses with everything from toilet paper to power drills. Grainger is one of just a couple of big fish in an extremely fragmented industry, which gives the firm the ability to serve bigger national accounts as well as to grow its business on a regional basis. Size means that GWW can provide cost benefits that smaller, less-efficient competitors can’t match.

While the firm’s footprint covers more than 600 brick-and-mortar branches, online sales have been a major growth area for Grainger in the last few years, now climbing to almost a fifth of total sales. That makes GWW better able to challenge Fastenal’s (FAST) huge store network. While Grainger may be a big fish in the industrial supply business, FAST is the whale, and any playing field levelers are huge for GWW. As industrial spending ticks higher in 2013, Grainger shouldn’t have trouble finding another year of growth.

Grainger has a long track record of returning value to shareholders. The firm has hiked its dividend every consecutive year for more than four decades now -- and I think it’s a safe bet for that trend to continue in 2013, particularly as GWW posts even bigger profits. Until then, the firm’s 80-cent quarterly payout amounts to a 1.4% yield.

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, 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.