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Dividends have become an attractive part of the market, especially considering the low rates of fixed income assets. With one year CDs (certificate of deposit) rates hovering around 1%, versus the dividend yields of 2% for the S&P 500, and 2.8% for the Dow Jones Industrials, dividend paying stocks have rightfully had their share of attention in the past several years.

This replacement of fixed income by high dividend stocks has left many investors feeling euphoric, especially considering the high amount of dividend increases this past year. In fact, total dividend net increases for Q2 2012 totaled $12.0 billion, setting what is believed to be a new record dividend payout in aggregate dollars for U.S. domestic listed common stock issues. But can these attractive increases continue?

A great way to measure a company's capability to increase its dividend payout is its payout ratio. Let's examine some popular dividend paying companies and this important metric, to assist in determining which companies offer the most flexibility to increase the dividend in the future, and which are currently the healthiest.

StockTVZDINTCPGJNJMCDCVXFCXGEPEPBMY
Current Dividend Yield4.71%4.52%4.21%4.01%3.32%3.5%3.30%3.23%3.2%3.1%3.1%4%
Expected EPS Growth '137%15%9%3%0%7%10%-2%43%16%8%-7%
Current Payout Ratio75.2%89.2%88.7%38.1%72.3%77.7%57.9%26.8%37.7%54.8%56.6%65.4%
Payout Ratio '1178.2%70.5%64.3%32.6%52.4%45%48%23.4%20.7%44.5%46.4%57.9%

Payout Ratio '10

73%86.2%55.1%31.2%50.9%44.3%49%30.3%9.9%41.1%23.2%59.3%
Payout Ratio Growth Since '102.74%3.48%60.98%22.11%42%75.4%18.16%-11%280%33.3%144%10.2%

Dividend Strength

AT&T (NYSE:T): 4.71% Yield. Current payout ratio of 75.2%, 7% EPS growth forecasted for 2013, with 2.74% payout ratio growth since 2010.

Verizon (NYSE:VZ): 4.52% Yield. Current payout ratio of 89.2%, 15% EPS growth forecasted for 2013, with 3.48% payout ratio growth since 2010.

Dominion Resources (NYSE:D): 4.21% Yield. Current payout ratio of 88.7%, 9% EPS growth forecasted for 2013, with 60.98% payout ratio growth since 2010.

Intel (NASDAQ:INTC): 4.01% Yield. Current payout ratio of 38.1%, 3% EPS growth forecasted for 2013, with 22.11% payout ratio growth since 2010.

Procter & Gamble (NYSE:PG): 3.32% Yield. Current payout ratio of 72.3%, 0% EPS growth forecasted for 2013, with 42% payout ratio growth since 2010.

Johnson & Johnson (NYSE:JNJ): 3.5% Yield. Current payout ratio of 77.7%, 7% EPS growth forecasted for 2013, with 75.4% payout ratio growth since 2010.

McDonald's (NYSE:MCD): 3.3% Yield. Current payout ratio of 57.9%, 10% EPS growth forecasted for 2013, with 18.16% payout ratio growth since 2010.

Chevron (NYSE:CVX): 3.23% Yield. Current payout ratio of 26.8%, -2% EPS growth forecasted for 2013, with -11% payout ratio growth since 2010.

Freeport-McMoRan (NYSE:FCX): 3.2% Yield. Current payout ratio of 37.7%, 43% EPS growth forecasted for 2013, with 280% payout ratio growth since 2010.

General Electric (NYSE:GE): 3.1% Yield. Current payout ratio of 54.8%, 16% EPS growth forecasted for 2013, with 33.3% payout ratio growth since 2010.

Pepsi (NYSE:PEP): 3.1% Yield. Current payout ratio of 56.6%, 8% EPS growth forecasted for 2013, with 144% payout ratio growth since 2010.

Bristol-Myers Squibb (NYSE:BMY): 4% Yield. Current payout ratio of 65.4%, -7% EPS growth forecasted for 2013, with 10.2% payout ratio growth since 2010.

Summary

These companies have grown their dividends over the years which is great for shareholders. However, most of their payout ratios have grown as well. Of these 12 stocks I have randomly chosen due to their juicy dividends and popularity in the market, their payout ratios have increased an average of 59.24% over the last 2 years. This is great for investors and speaks to how management values shareholders. However, it also implies these companies probably cannot increase their payouts at this same feverish pace, as it indicates the dividends have grown faster than earnings have.

Action

If you are investigating these stocks for an addition to your portfolio, I would consider MCD and GE. With EPS growth estimates of 10% and 16% for 2013, and yields of over 3%, their basic metrics seem attractive. More importantly, their payout ratios of under 60% offer an opportunity for dividend increases to continue going forward. In comparison to stocks like VZ and D with payout ratios of nearly 90% each, MCD and GE seem much healthier in this regard. It's important not to let a slightly higher yield fool you into thinking a particular company is healthier than another. For example, if MCD and GE had the same payout ratio as VZ, GE's dividend would yield 4.87%, and MCD's dividend would yield 5.17%, which would be more than VZ itself in this scenario. Again, payout ratios can illuminate the overall health of a dividend, how much of an increase is due to actual EPS growth, and the likelihood increases could continue going forward.

Disclosure: I am long GE, BMY, INTC. 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.

Additional disclosure: I may initiate a long position in MCD over the next 72 hours. I have owned long positions in T, VZ, FCX, CVX within the last 2 years.

Source: Popular Dividend Companies And Their Payout Ratios