3 Midcap Stocks With Rising Dividends

Companies can and should pay bigger dividends. Over 130 years ended 2000, the average U.S. company paid 62% of its profits to stockholders as dividends. Last year, the payout percentage for S&P 500 companies was 47%. Forecasts for this year call for strong earnings growth but only gradual dividend increases, which will reduce the payout ratio to about 40%.

The modern view perhaps holds that companies ought to divert their funds to internal investments or share repurchases rather than dividends, but this seems flawed, for three reasons. First, long-term evidence suggests that companies that pay out plenty of their profits as dividends go on to produce faster earnings growth than those that don't. Second, the past two years have proved that most companies continue paying dividends during severe market downturns, allowing for reinvestment at bargain prices, but nearly all abandon their share repurchase programs. Third, studies show that dividends and not price gains have made up the bulk of historic stock returns. Can it be mere coincidence that the past decade of dividend stinginess has also been one of poor total returns?

While the three companies below could surely pay more, at least they've recently boosted their dividend spending. All are members of the S&P MidCap 400 index, which is to say they have medium-size stock market values, and all recently grew their quarterly sales versus a year earlier. Together, those two attributes suggest these companies have room to expand, and to hopefully keep the dividend increases coming.

Church & Dwight (CHD) sells Arm & Hammer baking soda, and a long list of other products based on the brand, such as carpet cleaner, laundry detergent, toothpaste and deodorant. Other key products include Oxi-Clean detergent, Trojan condoms, Nair hair remover and First Response pregnancy tests. Church & Dwight is relatively small, with half the stock market value of Clorox (CLX) and less than 5% of that of Procter & Gamble (PG). Scale favors margins in the household products business, so Church & Dwight turns only about 16 cents of each sales dollar into operating profit, four to five cents less than its larger rivals. But the company has made steady improvements over the past decade, and its stock has multiplied fourfold in value. Management last boosted the quarterly dividend in July, to 14 cents a share from nine. It's still too small, making for a yield of just 0.9%. The company has made payments for 435 straight quarters.

Like TJ Maxx, Ross Stores (ROST) is an opportunistic merchandiser, meaning that it scoops up surplus clothing from manufacturers and other stores and sells it cheaply. The strategy earns Ross far bigger profit margins than those achieved by deep discounters like Wal-Mart (WMT) or by department stores like JC Penney (JCP) and Macy's (M). While other clothing stores struggled to preserve sales over the past year, Ross increased them by an estimated 10%, as former shoppers of high-price stores turned newly keen on bargains. Over the past decade, Ross shares have multiplied sevenfold in value. Management has boosted the dividend for 15 straight years, recently announcing increases early in the year. It seems due for another. Shares yield 1%.

Perrigo (PRGO) shares yield a measly 0.6%, but their owners have little to complain about. The stock price has multiplied fivefold in a decade. The drug maker has the second-largest manufacturing capacity for generic medicine behind Teva Pharmaceutical (TEVA), and holds a remarkable 70% share of the U.S. market for store-brand, over-the-counter drugs. For some products, it makes both branded and store-brand versions. Although the company's operating margins are higher than those of most generic drug specialists, they're not nearly as large as those of pharmaceutical giants like Pfizer (PFE) and Merck (MRK). But then, Perrigo, unlike those larger names, stands to profit from a steady parade of patent expirations in coming years. Management last announced a dividend increase in October.