The Canaries In The Dividend Mine

Includes: CVS, GGG, WSM, WSO
by: Stephen Rosenman

Come January 1, dividends are set to lose their favorable tax treatment. If Congress doesn't act, dividends will no longer be taxed at a 15% rate. Instead, they'll be treated as ordinary income with taxes reaching as high as 43% for the upper brackets.

How will corporate boards across America respond should Congress allow dividend tax rates to climb - especially as most stock-holding directors fall in the highest tax brackets?

The best tell: The companies that have raised their dividend reliably year after year. They were the only 4 stocks in the prized dividend champion, contender, and challenger categories that raised their dividend for last January. They are therefore "due" to boost them again this coming January.

They are CVS (NYSE:CVS), Graco (NYSE:GGG), Williams-Sonoma (NYSE:WSM), and Watsco (NYSE:WSO). I've excluded companies with market caps under $2 billion.

They will be the canaries in the dividend mine. They did some heavy lifting last January: Williams-Sonoma raised its dividend by 29%; CVS by 30%; Graco by 7%; Watsco by 9%. That's real commitment. We're about to find out whether corporate boards across America are still dedicated to their dividends and we'll do that by focusing on CVS, Graco, Williams-Sonoma, and Watsco.

Here are a few of their stats:

- CVS, the pharmacy chain, has a 1.4% dividend with a 21% payout.

- Graco, the industrial manufacturer, has a 1.8% dividend with a 40% payout.

- Williams-Sonoma, the specialty retailer, has a 1.9% dividend with a 37% payout.

- Watsco, the HVAC distributor has a 3.4% with a 82% payout.

The key "canary" questions: Will they boost their dividend this January? And, if so, by how much? Do they move their dividend into this December?

Robust dividend bumps imply "Damn the torpedoes, full-steam ahead." Should all four companies lift their dividend, expect smooth sailing in dividend-paying stocks with lots of dividend hikes.

Moving a dividend hike into December suggests a hint of worry as well as a hope for a favorable fiscal cliff resolution.

And if they pass on a dividend increase? That just might be a harbinger of a lackluster year for other dividend-paying stocks. Then be prepared for modest to no dividend raises throughout 2013.

Perhaps most important - how will the market react to dividend hikes or passes? Will investors yawn if CVS boosts its dividend by 30% again? Will Williams-Sonoma crater if it keeps its dividend the same?

"The Canaries In The Dividend Mine" will likely set the tone for dividend-paying stocks in 2013. Those four names - CVS, Graco, Williams-Sonoma, and Watsco - will test the market's appetite for dividend-paying stock. How their boards handle the January dividend will provide a great tell for forecasting other companies' dividend moves.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.