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Three U.S. dividend stocks with rising payout potential

shrink small shrinking stocks dividends

George Doyle/(c) George Doyle

Dividends continue to offer investors some security in this volatile trading environment. With the economy staring down the barrel of a potential double-dip recession, investors should gravitate toward stocks of companies that return cash to shareholders.

The yield on the 10-year Treasury note is currently down around 2.2 per cent. Meanwhile, there are nearly 200 stocks, or 40 per cent of the S&P 500, that have a dividend yield north of that benchmark figure. In addition, many of these companies are well capitalized and have the potential to grow their payouts in the coming quarters.

One such name that recently raised its dividend is Brinker International . The operator of casual restaurants like Chili's boosted its payout earlier this week to $0.16 a share. The company is currently a little too small to be included in the S&P 500; however, Brinker's 2.8 per cent dividend yield is toward the high end of the industry range.

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In addition, the company is on track to post its second straight year of double-digit earnings growth and the dividend can be covered 2.9 times with expected fiscal 2012 (ending June) earnings.

Another company that recently boosted its dividend is Altria . Management raised the quarterly dividend on Aug. 26 to $0.41 a share. The company has increased its payment 45 times in the past 42 years and now yields 6.2 per cent.

In general, I like to see that a company consistently pays out no more than 50 per cent of its annual earnings. That said, Altria's earnings growth is more stable than most companies in the S&P 500 and I believe that the company's long-term target of paying out 80 per cent of its earnings as dividends is sustainable.

Both of the stocks I've mentioned so far have outperformed the broader market averages year-to-date. On the other hand, Microsoft is one blue-chip company which has lagged the market in 2011 but will likely raise its dividend by the end of the year.

At Monday's closing price of $25.84, the stock yields 2.5 per cent. Microsoft currently pays a quarterly dividend of $0.16 a share. The company has established a pattern in recent years of raising its payout each September and I believe that that management will boost the dividend once again this time around.

Microsoft is expected to earn $2.87 a share in fiscal 2012 (ending June), which is enough to cover the current dividend 4.5 times. The stock also appears inexpensive at just 9 times expected forward earnings.

Microsoft is no longer the market leader it was a decade ago. Even so, the company has a pristine balance sheet and continues to generate solid earnings growth. As a result, management has the capacity to boost the dividend yield up toward 3 per cent in the coming weeks.

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