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By Josh Peters, CFA | 09-30-2009 04:38 AM

Where to Look for Dividend Growth

Even though dividend payouts may be slow to rise for the next year or two, investors we can still find companies with strong dividend prospects.

Josh Peters: Hello. This is Josh Peters, editor of Morningstar DividendInvestor.

It certainly has been an interesting year on the dividend front, but perhaps it's getting a little bit less interesting. And I think that's probably a good thing. Over the last couple of months, we haven't seen the kind of dividend cuts and dividend omissions that were taking place late last year and earlier this year, which was frankly the worst stretch for dividends going all the way back to the Great Depression.

In the last couple of months, what we've seen is more normal type of patterns. The kind of companies that raise their dividends every year have managed to put out those increases, even if they're not normally as big of increases as you'd like to see.

So let's start looking forward. If the tone has turned back toward dividends' normal pattern of going up, then what can we expect from different companies and different sectors in the years ahead?

First let's take a look at the biggest source of dividend income that has disappointed investors in the last couple of years, and that's banks. It was very interesting to see, over the last couple of weeks, managers of both US Bancorp and JPMorgan Chase sounding ideas that their dividends could be heading toward increases in the near term. This is really good news, for a number of different reasons, not least of which is the idea that it's going to put more money into shareholders' pockets. It's also sending a signal that loan losses may be peaking and earnings may be starting to improve.

For the whole sector, though, watch out. There will be a lot of different companies in these financial industries, banks in particular, that are going to have to continue to pay for loan losses, going to have to continue to build capital levels in order to strengthen their balance sheets, before any kind of dividend increase will come onto the agenda. To look for dividend growth, best stick with some of the strongest players, especially a stock like US Bancorp that's committed to returning a lot of cash to shareholders.

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