Four standouts for growth and income

In good times or bad, dividend increases make a difference. A history of dividend increases suggests a company possesses ?nancial fortitude and a commitment to sharing the wealth with stockholders.

We've found four standouts that have shown steady dividend increases, with three-year annualized growth rates of at least 9%: Abbott Laboratories (ABT), Dover (DOV), IBM (IBM) and Microsoft (MSFT).

These found stocks are also expected to grow per-share earnings this year and in each of the next two years.

Abbott has increased its quarterly dividend in 39 consecutive years. In the past three years, the dividend has grown at an annualized rate of 10%, topping the other big U.S. drug companies.

The stock, up 12% this year, offers a 3.5% yield, exceeding its ?ve- year average of 3.0%.

The dividend, however, will undergo a shift from its present form next year when Abbott splits its pharmaceutical unit ($18 billion in sales) from the rest of its businesses ($20 billion).

Both companies will pay a dividend, and taken together, their distributions should equal Abbott�s dividend at the time of the separation.

Backstopped by strong balance sheets, both new companies should also receive investment-grade credit ratings, Abbott says.

Some speculate that the new pharmaceutical company could receive a heftier portion of debt and cash, since the medical-devices business will likely be better equipped to generate free cash ?ow. Abbott Labs is a Long-Term Buy.

Dover, an industrial conglomerate, makes everything from hydraulic lifts to refrigeration systems to hearing-aid components.
Order activity remained strong in the opening weeks of the December quarter, management says, building on the 20% increase in bookings during the September quarter.

Dover anticipates revenue will climb 20% in 2011, bolstered by at least 8% organic growth in all four segments. Free cash ? ow is on pace to represent 10% to 11% of revenue for the year.

That implies a record $856 million to $941 million in free cash ?ow, marking the strongest growth since 2003. That cash will likely fund Dover�s steady stream of dividend hikes and acquisitions.

Dover announced a 15% dividend increase in August, marking its 56th consecutive year of dividend growth. Dover has also purchased at least eight companies so far this year, spending more than $1.37 billion.

In its latest deal, completed in November, Dover acquired Advansor A/S of Denmark to expand its presence in the refrigeration-equipment market. Dover is a Long-Term Buy. �

IBM uses a two- pronged approach for sharing pro? ts with stockholders. The dividend has grown for 16 straight years, including a 15% hike in May.

The tech giant has raised its payout at an annualized rate of 26% over the last ? ve years, well above its growth rate for per-share profits (17%) and operating cash ?ow (5%).

IBM also has a seemingly insatiable appetite for its own stock, buying back enough to lower the share count 5% over the last year and 21% over the last ?ve years.

Looking ahead, IBM seems capable of returning even more cash to share- holders. Despite the steady dividend growth, IBM�s payout ratio is a modest 23% of trailing earnings.

Management expects $100 billion in free cash ?ow over the next ? ve years, translating to 12% growth from the previous ?ve years.

Roughly 70% of that cash should return to shareholders through dividends and buybacks. IBM is a Long-Term Buy.

Microsoft raised its dividend 25% in September, nearly double its ?ve-year annual growth rate.

The dividend hike pushed Microsoft�s yield to 2.9%, well above the 2.0% average for dividend- paying technology stocks in the S&P 500 Index.

The company has $11.2 billion remaining from a $40 billion share-repurchase program launched in 2008. That balance is enough to buy back about 5% of outstanding shares at current prices.

In the past year, Microsoft has spent $5.4 billion in dividends and $8.5 billion on repurchases.

Yet Microsoft�s massive cash hoard still gives it plenty of ?exibility. The software giant generated $19.66 billion in free cash ?ow in the 12 months ended September.

It now holds $57.40 billion in cash and short-term investments � though roughly 90% is offshore � versus long-term debt of $11.92 billion.

Net cash equals $5.36 per share, roughly 20% of the stock price. Microsoft is a Buy and a Long- Term Buy.