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Earnings Season Is Dividend Season

|Includes: Alcoa, Inc. (AA), ACN, GLW, LMT, MCD
As the third quarter ended nearly two weeks ago, we are beginning to see earnings reports file in. Traditionally, major companies such as Alcoa (NYSE: AA) kick off the slate, and its report can be a important window into industrial demand and output. Some of the major financial stocks follow up, and each quarter investors begin their ritual of scrutiny on companies and their performances, all to get a handle on stocks and the economy.

Along with the earnings announcements, many companies around this time also announce dividend increases. Some companies, such as McDonald's (NYSE: MCD), whose increase we wrote about recently, tend to do this the same time each year. So, many investors look to the fall in anticipation of a McDonald's dividend increase. Many dividend investors closely watch stocks they've picked out and follow them, noting the dividend increases and carefully use this along with the fundamentals such as earnings to determine whether, when or how much of a dividend stock they're going to buy. We do the same, of course, and pass on some of the news here.

The Value Of Dividends, Once Again

Dividend stocks often look to the untrained eye as if there's nothing happening, but this is completely wrong. Dividend stocks are often like the smooth waters of a pond, where nothing much appears to be happening compared to fast moving growth stocks which make all the waves and attract most of the media attention. But underneath the surface, there's often a steady current of increasing income or improving fundamentals. It's been repeated so often that it's probably ignored, but dividend paying stocks are responsible for much of the total appreciation of S & P stocks, and on average, dividend paying stocks do outperform non-dividend paying stocks in the aggregate. So that's a creed dividend investors know well.

The Current Dividend Landscape

We'll look at some specific stocks in a moment, and while not all of these are raising their dividends currently, nor do all of them necessarily pay a very high yield, keep in mind that there are all kinds of combinations of investment strategies you can employ with dividend stocks. A combination of income and capital appreciation is one way, while just buying the stock to collect the income is of course another. But first it helps to sketch out what the dividend playing field looks like right now.

A recent release by S & P Indices mentioned that yields increased to an average of 2.99% by the end of the third quarter this year, which was an increase from 2.51% and 2.39% during the second and first quarters of 2011 respectively. The report stated that for the third quarter in 2011, 350 stocks increased their dividends compared to 299 stocks during the third quarter of 2010. Only 23 companies reduced dividends during this time, fewer than last year. Forty percent of stocks paid a dividend, compared to 37.9 percent which paid at the end of last year.

Searching For Prospects

One of the most enjoyable things about being a dividend investor is the constant search you can undertake to uncover gems. With over 2,000 stocks paying dividends, that's a lot of ground to cover, but many attractive stocks are actually highly visible. We mention Corning (NYSE: GLW), which just last week announced a quarterly dividend increase to $0.075 a share from $0.05 per share. This is a 50% increase in the payout, and boosts Corning's yield to 2.2% from 1.5%. Now that's not a high yield, but the increase is significant. Critics would point out that Corning has warned that its earnings for the third quarter will come in at 25% to 30% lower than its second quarter earnings, but long term, this is a company that's an industry leader. It announced a $1.5 billion stock buyback and despite momentary weakness and supply chain disruptions in the LCD tv panel business, Corning has strong cash flow and grows its earnings at more than 10% annually. The stock is selling near its 52-week low at a 6 PE.

Corning Inc. One Year Stock Chart

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Some Other Prospects

Consulting firm Accenture (NYSE: ACN) is another company that probably flies under the radar of many, but it shouldn't. It recently raised its quarterly dividend payment to $0.68 a share, an increase of 50%. The company has a load of cash on its balance sheet, more than $5 billion, no debt, and its expertise is in demand in the high efficiency environment that permeates corporate business today. The yield is not spectacular at 2.5%, but this is a stock to look at for a combination of capital appreciation and yield. Investors might want to wait for a lower entry point, though, as the stock has been run up this year and is still trading toward its higher end.

Defense contractor Lockheed Martin (NYSE: LMT), on the other hand, does have a significant yield of 5.3%. This stock is heavily institutionally owned at around 90%. The stock is trading relatively near its 52-week high, but still trades at a PE under 10. Earnings growth, despite the uncertainty of defense stocks, should be around 10%, and its PEG is 0.95. Lockheed is trying to diversify its business, though it generates $46 billion in annual revenue now. It raised its dividend by one third, adding to its already rich payout.

Lockheed Martin One Year Chart

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We'll feature more prospects as we continue our never-ending search for attractive stocks of good companies which pay dividends. Remember, the dividend increases mean more cash for you, the investor.

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