Standard & Poor’s reported that it anticipates dividend payers in the S & P 500 to raise their dividends by 6.1% in 2010. This would represent the first time since 2007 that dividends were raised. Assuming this comes to pass, what dividend yielding stocks will raise their dividends faster than others? What are some key signs to look for to predict that a company will raise its dividend in the near future?

Dividend payout ratio begins to decrease. Given that dividend payout ratio is determined by dividends paid per share over earnings per shares, the ratio tends to move downward if earnings per share increase. However, the one thing to keep in mind is that a decreasing dividend payout ratio does NOT mean a company will necessarily increase its dividend.

Most companies have ideal dividend payout ratios. In most cases, a company will not declare a dividend increase unless the ratios come back into their optimal range. For example, most financial institutions have an ideal dividend payout ratio of 35%-50%. TD Bank Financial Group’s dividend payout ratio was 70.3% as of the 12 months ending October 31, 2009 as opposed to 49% in the prior 12 month period.

In other words, it is unrealistic for dividend shareholders to simply ask for a dividend increase as soon as the company begins to return to profitability especially in the battered financial services industry.

Earnings must be sustainable. Given that dividends are “sticky”, companies are loathe to increase them unless they know that the medium to long term financial prospects of the company are bright. Many companies were able to turn profits by cutting costs; over time, an over-reliance on this strategy is not a recipe to build a good business. RBC has already indicated that trading profits from 2009 are simply not sustainable over the long term; in other words, it was a blip caused by how badly the market had crashed.

The end result is that attention must be paid to the quantity of the earnings going up as well as the quality of the earnings in order to support continual increases in dividends over time. Typically, this is created by organic growth over a wide variety of product lines (hence, most tech companies are not dividend payers; they are typically one-trick ponies in terms of product lines). A good example of organic earnings growth company would be Johnson and Johnson (with a very healthy dividend payout ratio of 41%).

Cash on hand. On a simplistic basis, a board of directors must decide whether cash either goes back into the business or back to the shareholders. If the company has relatively little cash on hand, logic dictates that the money should go back to the business. If the company has a lot of cash on hand and earnings begin to go back up, it will have greater opportunity to increase dividends.

However, what is important to note is that increasing cash on hand must be balanced by what the cash should be earmarked for. If there are more pressing needs than returning monies to shareholders, looking simply at cash on hand is not a good metric for anticipating dividend increases.

For example, let’s take a look at RioCan REIT. It has a cash on hand of approximately $215 million as of September 30, 2009; a not insubstantial sum given real estate use up a lot of cash. However, in its financials for the period ending September 30, 2009, it reports it is paying 34.5 cents to each unit-holder but it is only making 27 cents a unit from adjusted funds from operations (a non GAAP measure for real estate companies). In other words, it is paying out more than it is making.

In addition, RioCan has been issuing more units for acquisitions and general operating funds; the latest being a $10 million raise in November. Thus, while there appears to be cash on hand, it should be committed towards obligations, particularly its shortfall on monies paid out to that taken in, other than increasing its distribution. In this light, a distribution hike should be viewed skeptically.

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The above factors are some items to consider. Put them together and an ideal candidate to increase dividends tends to have the following characteristics:

1. The Company remains in its ideal dividend payout ratio zone (most companies will tell you want that zone is in its financials);
2. The Company is growing organically and not relying on some blip to increase earnings that cannot be repeated over time; and
3. There are no pressing needs for its cash on hand that would take priority over returning money to shareholders.