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I’m usually not a complainer.

I’m happy to eat whatever’s on the menu, turn up the radio in traffic jams and fix things instead of whine about them being broken.

But here’s a complaint. Two stocks on my watchlist raised their dividends too much, preventing me from buying them. This, even though I like their businesses and their over 4% yields.

Granted, I guess you could look at it a different way and say these companies haven’t been growing earnings fast enough. That would be right, too, but would also be another complaint, so I’ll stick with the one I’ve got.

The two stocks are smallcap Healthcare Services Group (NASDAQ:HCSG), which provides housekeeping, laundry, and similar services to facilities like nursing and retirement homes, and midcap Microchip Technology (NASDAQ:MCHP), a semiconducter firm specializing in microcontrollers for electronic devices like LCD displays and remote controls.

Both HCSG and MCHP have raised dividends nearly every quarter since mid-2003. Both show payout ratios well over 100%.

The good news is that MCHP’s highly cyclical earnings seem ready to soar, which could justify past dividend hikes, push the payout ratio down, and also put a stop to my complaining.

So let’s start with MCHP and I’ll get back to you with any good news on HCSG.

MCHP turned in a strong earnings report earlier this month, beating estimates on huge revenue gains and margin improvements, and waving the first good-bye to its payout ratio of 115% on trailing earnings.

And analysts’ estimates, imprecise as they are, put current fiscal year earnings at $2.11 and next year’s at $2.27, against the current dividend of $1.37.

Payout still seems a tad high?

Maybe, but MCHP generates good cash flow coverage, so more dividend increases look like a good bet, though perhaps they will be small. Over the past very tough year, MCHP’s dividend grew just 1%, but its double-digit average growth over the past three years looks better.

And MCHP rings up good business metrics, with return on equity at 13% and debt-to-equity at about 20%, all of this getting the company a Financial Grade of ‘A’ from Morningstar.

Valuations on depressed earnings are high, but price-to-cash flow and price-to-sales sit near their historical averages.

MCHP rewarded shareholders with more than a 30% total return over the trailing year, better than the market and the tech sector. It kept its head above water, and way above the technology sector, over the grueling past ten years for tech.

Like all stocks, especially smaller ones, MCHP is getting hammered in the current market swoon. But with its now 5% yield, dividend-growth record and improving fundamentals, MCHP might make a chipper choice for long-haul investors who want some technology exposure in an income portfolio.

OK, any good news on HCSG, with its 113% payout on trailing-year earnings, 178% payout on trailing-year operating cash flow, and 106% payout on this year’s estimated earnings?

It yields about 4.3%. It generates 14% ROE with no debt.

It operates a simple business in a growing industry that requires very low capital expenditures.

And if you owned it over the past five years, you averaged nearly 16% a year in total returns, or better yet, nearly 33% annually over the past decade.

But if, like me, you never bought it, at least you don’t have to worry about how in the world they can sustain that dividend.

To check out three stocks yielding 4% or higher that seem to have good dividend-growth prospects, click these links to my Seeking Alpha articles on Kimberly-Clark (NYSE:KMB), TransCanada Corp (NYSE:TRP) and Mercury General (NYSE:MCY).

Finally, dividend ETF investors who want to look beyond the usual choices might consider the WisdomTree Dividend ex-Financials ETF (NYSEARCA:DTN), which includes MCHP among its 80+ holdings and yields about 3.5%.

Except for financial services, which it doesn’t own, DTN spreads its well-diversified, high-quality stock portfolio more evenly across sectors than many of the more popular high-yield dividend ETFs, such as the SPDR S&P Dividend ETF (NYSEARCA:SDY).

One important note: DTN, unlike SDY, paid a higher Q1 dividend than year-ago, but is nevertheless built for dividend yield, not necessarily dividend growth.

References and Links

Disclosure: Author holds long positions in KMB, MCHP, MCY, TRP

Source: Two Stocks Raising Dividends Too Much?