Stocks With A Solid History Of Dividend Growth

Includes: CSX, EMR, ERIC, JPM, PBI, T, UNP
by: Investment Underground

I have identified five dividend stocks that I believe can best provide investors with solid income this year. While Pitney Bowes (NYSE:PBI) is the behemoth here with a yield of 7.8%, Union Pacific (NYSE:UNP), LM Ericsson (NASDAQ:ERIC), JPMorgan Chase (NYSE:JPM) and Emerson Electric (NYSE:EMR) also provide healthy dividends. I chose these five stocks because of their strong history of dividend growth performance. In this article, I will discuss how current economic conditions, recent merger developments and strong financials have put all five companies in a key position to grow dividends further.

Union Pacific Corporation is a railroad operator that offers a dividend yield of 2.1%. The company has been affected by a mandate from the government to install crash-avoidance technology, although that deadline is now being moved back five years. Executive vice president Lance Fritz has said the crash-avoidance technology will cost Union Pacific an additional $2 billion, and $400 million was spent in 2011 alone to try to become compliant. This is important because investors may see this as taking away from the company's primary focus on its operations, which would put downward pressure on the stock. However, in the long term, I believe that investors will see the company is trying to do the right thing by focusing efforts on this issue now, which will push the stock higher over the long run.

In other news, Union Pacific is investing $4 million to make track improvements to its operations in San Antonio. San Antonio residents have welcomed this decision, and the change should allow drivers to get their trains moving quicker. Union Pacific represents a solid investment because railroads are going to remain an important mode of transportation throughout the United States. With its beta of 1.31, I expect this stock to move higher as the economy continues to improve. Additionally, gross margin of 41.54% and operating margin of 29.27% make Union Pacific an attractive alternative to other railroad companies like CSX (NYSE:CSX). Furthermore, Union Pacific is well positioned for future dividend increases - the company had over $2.5 billion of free cash flow in 2011. Much of that money was used to buy back stock, but I wouldn't be surprised if dividends are increased as a more predictable way of returning value to shareholders.

LM Ericsson Telephone Company is a provider of communications equipment and services that offers a dividend yield of 2.7%. The company just signed an interesting new deal with Swisscom, which is a major operator in Switzerland. Indeed, Swisscom will leverage Ericsson's Device Connection Platform to build up the machine-to-machine market. Ericsson is also working with KPN International to upgrade their mobile backhaul in Germany and Belgium. Specifically, Ericsson will put in over 15,000 MINI-LINK transmission node links to help KPN's network remain stable as customers increase their data usage. Ericsson's work is necessary for Europe's communications environment to thrive, although the latest earnings report wasn't particularly thrilling. This is important, however, because Ericsson's future success in Europe will likely have a direct impact on share price. CEO Hans Vestberg blamed some of that on the failed merger between AT&T (NYSE:T) and T-Mobile USA, which caused both operators to limit their spending while the deal still seemed viable. With that in mind, I expect Ericsson to enjoy a nice rebound. Ericsson may not be eager to increase dividends until the global economy truly improves and Europe's debt situation is closer to resolution, but this stock should still be seen as attractive. Nearly $5 billion of free cash flow in 2011 is one testament to this company's success with its renewed focus on communications equipment.

JPMorgan Chase & Co. is a global banking corporation that offers a dividend yield of 2.6%. The company just settled overdraft fee litigation brought by customers in Florida for $110 million. According to the lawsuit, JPMorgan Chase was posting transactions in a manner so that the largest ones would come first, which would have a greater chance of causing an overdraft (and therefore a fee). While this doesn't help Wall Street's PR problem with the rest of society, it does help JPMorgan and its shareholders.

In other news, New York Attorney General Eric Schneiderman is suing JP Morgan Chase in addition to a few other banks. Schneiderman says the banks used their MERS system to evade fees and in the process caused confusion among homeowners and other interested parties. While JPMorgan Chase's litigation situation is unfortunate, this stock is still worth consideration from investors. The Florida settlement is a win for investors because it reduces uncertainty. I predict that the bank's management, particularly CEO Jamie Dimon, will use its wisdom to guide the company through these difficulties. The annual dividend is currently $1, and this number probably will be maintained for a very long time since JPMorgan Chase still has some work to do to raise capital. Regardless, I expect JPMorgan Chase's investment banking performance to improve, which will lead to stock price appreciation. Headline risk has pushed the share price down too far in my opinion. I would be a buyer at the current price.

Pitney Bowes Inc. is a provider of mail equipment and solutions that offers a dividend yield of 7.8%. Pitney Bowes Software just announced that a report called The Forrester Wave: Cross-Channel Campaign Management ranked it as a Strong Performer. Indeed, Pitney Bowes received the best scores possible for categories such as data management, financial and interaction management. Another important story for Pitney Bowes is about its Volly secure digital delivery service. Forty strategic alliance agreements have been signed that will allow Pitney Bowes to gain market share with the organizations that mail the most. Pitney Bowes is also opening a Global Technology Center in Danbury, Connecticut. The facility figures to help improve Pitney Bowes' innovation. As for Pitney Bowes' dividends, I am tempted to believe that the company can keep them up despite some economic headwinds. With over $700 million of free cash flow in 2010 and over $600 million of free cash flow in the first three quarters of 2011, Pitney Bowes' business is well suited for being a dividend giant. Low interest rates should keep Pitney Bowes debt payments subdued, which will also give the company extra leeway for distributing dividends. Pitney Bowes has even had money left over for buying stock in recent months.

Emerson Electric Company is a maker of industrial equipment and components that offers a dividend yield of 3%. The company just reported its fiscal first quarter earnings, which were lower than expected. While management claims that the floods in Thailand disrupted global supply chains, a financially uncertain Europe also contributed to a poor quarter. Here's what CEO David Farr had to say about that: "I feel better about Europe today than I did a couple months ago because of the actions being taken by government and the actions being taken by the banks and financial community. So even though we see a recession, we are still going to say that we have underlying growth in Europe in 2012." Results in China were poor as well due to a weak housing and commercial construction situation, but Emerson Electric will definitely be able to keep its dividends going. In fact, Emerson Electric had over $2.5 billion of free cash flow in fiscal year 2011, and a large portion of that was even used to buy back stock. I suspect that Emerson Electric will benefit as telecommunications companies in particular renew their spending. Investors should keep in mind that AT&T and T-Mobile USA put a temporary hold on spending when they thought its merger might go through as planned.

Investors should see the latest weakness as an opportunity. Thailand floods will subside. European sales will bounce back as customers restock inventories of Emerson products. On the domestic front, I anticipate a rise in telecom spending this year, and Emerson will be among the beneficiaries. Its Network Power division should see significant orders over the next few quarters.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.