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5 Surprising and Special Dividend Stocks

Jim Royal
April 8, 2011

Investors love to find catalysts for their stocks. Special situations such as spinoffs or restructurings can unlock hidden value and produce accelerated returns. It's an attractive way to play the market, and it's a method I follow in my Rising Stars Portfolio. But many investors overlook one of the best catalysts for stoking capital gains -- dividend increases -- since an increase signals management's confidence in the business prospects.

Special situation, meet income investing
If you've clicked on this article, you probably love dividend stocks as much as I do. I've written extensively about income investing, detailing the dividend play for a lifetime, the outstanding dividend stock I was buying in January, and other high yields to own for decades.  But I think you can do even better by combining your focus on dividend payers and special situations.

At its heart, special situations investing is about finding specific events, such as forced selling of a spinoff, that aren't yet reflected in stock prices for technical reasons rather than fundamental business reasons. Such events often create big inefficiencies in the market.

For dividend investors, special situations could involve companies that have just started a dividend. While many investors regard a dividend initiation as a tacit admission that the company cannot grow as fast as it once did and therefore exit the stock, a dividend also draws in a whole new investor base, too. Because income-focused indexes and other funds cannot buy a stock until it pays a dividend, there's pent-up demand for shares.

Take Starbucks (Nasdaq: SBUX  ) , for instance, which just started its payout last year. Often, in the early years of their dividends, such companies quickly ramp their payouts, as Starbucks did when it announced a 30% hike the quarter after it began the dividend. The stock is up 49% over the past year, and I won't be surprised to see above-average dividend gains in future quarters.

And now for the contenders...
Below are five companies that can boast above-trend dividend growth and may benefit from a rapid dividend increase or an initiation:



Surprising because...

Cisco (Nasdaq: CSCO  ) 1.3% The world's largest communications equipment company has initiated a dividend
McDonald's (NYSE: MCD  ) 3.2% The company has committed to paying out all free cash flow, either as dividends or buybacks
Seaspan (NYSE: SSW  ) 3.6% The company has promised a "progressive" dividend policy as earnings ramp and a 50% dividend raise
BP (NYSE: BP  ) 3.6% BP has also promised a progressive dividend policy
Church & Dwight (NYSE: CHD  ) 1.7% The company bumped up the dividend by 100% in the latest quarter, on top of a 21% bump in mid-2010

Cisco has decided that it wants to join the dividend game and now offers a 1.3% yield, a payout ratio of just 14% of free cash flow. That leaves plenty of room for accelerated dividend gr