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The Blue Chip Dividend Hike Is Coming

One reliable metric tells me that the average S&P 500 company will raise its dividend by 10% – 15% over the next year. That will mean more money in the pocket of current shareholders and added incentive to own dividend-paying stocks.

I’m not making this prediction without solid evidence to support my claim. And to be honest, my prediction might even be conservative. Even if the average dividend payout increased by 15%, it would still be well within the historical norm.

So what’s the basis for my claim? Hard facts.

Recent data from Bank of America Merrill Lynch (NYSE:BAC) shows that since 1990, the average dividend payout ratio of the S&P 500 was 54%.

Yet today that ratio sits at a mere 36%. That means the dividend payout ratio could rise by 18 percentage points just to get back to the long-term average.

If you need a refresher on what the dividend payout ratio is, it’s simply the percentage of earnings paid out in dividends; i.e. Dividends ÷ Net Income

CEO’s are very aware of what their company’s average dividend payout ratio is, as are shareholders. And good companies strive to maintain a constant payout ratio over time, and even increase it when times are good.

Today many of America’s biggest companies are swimming in cash. And many CEOs are sharing the profits by increasing their dividend to reward shareholders. And the data clearly shows that there is more room for dividends to go up. Even as compared to the average payout ratio over just the last 20 years.

There are of course other ways by which companies can return money to shareholders. Another method – share buy-backs – is currently en vogue. In fact 56% of S&P 500 companies have reduced their share counts though stock buy backs over the last year.

But with other income alternatives paying paltry yields, stock dividends appear to be the preferred method for rewarding long-term shareholders right now. So much so that 82% of companies in the S&P 500 now pay dividends – more than at any time since 1999.

These companies aren’t just paying out dividends because CEO’s think it is good policy and because shareholders want the income however. They’re doing it because, by and large, corporate balance sheets are in good shape and profits are on the rise.

Of the 95% of S&P 500 companies that have already reported Q2 earnings, more than 70% have beaten earnings estimates. And earnings are expected to rise again in 2014.

With America’s largest companies posting record earnings, CEOs need to bump up dividends or the payout ratio will fall even further below the historical norm. Based on corporate health and the improving economy, I expect a 10 – 15% jump in dividends over the next year.

Invest accordingly, and look forward to growing dividends from your favorite blue chip stocks.