Lots of folks are talking about dividend stocks right now, and with good reason. When stocks' yields outpace those of bonds, as they do now, that's a classic buy signal. Doubly so when the market appears volatile: A stock that pays a dividend that's both high and sustainable will reward you even when the market is going south. At moments when the market seems like it could take a big swing down, loading up on dividend stocks is an appealing move.

In fact, if you choose to reinvest that dividend -- and unless you're retired, it's a good idea to do so -- you get a dollar-cost averaging effect when the stock's price is down. That means more shares for you, and more money in your portfolio when the price swings back the other way.

Think that might make it easier to put up with Mr. Market's mood swings?

The caveat with dividend stocks, of course, is that they aren't likely to give you tons of growth, at least not anytime soon. Companies that pay dividends tend to be established, stable, cash-rich; they're good companies to own, but not 20-baggers. But you can definitely make money -- big money -- by holding great dividend stocks in an IRA.

In fact, I think of dividend stocks as just about the perfect IRA investment. But what makes a great dividend stock?

Here's one factor: Rising dividends.

Stocks that give you a raise
Any company can hike dividends once or twice every now and then. But some companies have a long-standing tradition of raising their dividends every year, through good times and bad. These firms make that dividend increase a key part of their overall financial plans.

As long as the company isn't raising dividends to a level it can't afford, that's a good thing. History is full of examples of companies in a downhill spiral, including Lehman Brothers and prebankruptcy General Motors, that insisted on paying dividends they couldn't really afford. But in general, a healthy company with a long tradition of raising dividends will reward investors in a couple of different ways.

First, you get a raise every year! Second, and perhaps less obviously, those raises will tend to drive share price appreciation over time. Notice how dividend yields rarely get beyond 6% or 7%? That's true even for companies that follow a policy of aggressively raising dividends, for a very simple reason: Investors like to buy them, which drives the prices up over time.

So how do we find companies like these? When seeking such stocks for my own account, I started with Standard & Poor's list of Dividend Aristocrats: companies that have raised their dividends annually for at least 25 years in a row. I then screened that list for companies with strong yields that were also rated four stars or higher in Motley Fool CAPS. While a high CAPS rating isn't a slam-dunk buy signal all by itself, it can often signal that the company's fundamentals are in pretty good shape, and that the stock price isn't out of line.

Here are some of the stocks I found:


CAPS Rating


Size of Most Recent Increase

Consecutive Years of Increases

Automatic Data Processing (Nasdaq: ADP)





Cincinnati Financial (Nasdaq: CINF)





Consolidated Edison (NYSE: ED)





Johnson & Johnson (NYSE: JNJ)





Abbott Labs (NYSE: ABT)





PPG Industries (NYSE: PPG)





VF Corp. (NYSE: VFC)





Source: Standard & Poor's, Motley Fool CAPS, Yahoo! Finance.

To be clear, these are just ideas, not formal recommendations. Whenever you're buying a dividend stock as a long-term hold, it's important to make sure that the company can continue to pay you going forward; the long track record of increases is worthless if it ends while you own the stock!

As you can see, though, it's an interesting list. Some are megacap household names -- stop me if you haven't heard of Johnson & Johnson -- but some are less-well-known. VF, for example, owns a bunch of big-name clothing brands that you're probably very familiar with -- Lee jeans, North Face outdoor gear, Nautica -- though the company itself isn't quite a household name. Those brands make for a steady business, with more than $1.1 billion in free cash flow over the last 12 months. That bodes well for the sustainability of that dividend.

Also, as you can see, some of these increases seem kind of trivial. PPG went from $0.54 to $0.55 a share, for instance, which might make the whole argument around rising dividends seem moot. But I'd argue it's not. Even a trivial increase shows that the company is serious about taking care of its investors, and that's an attitude that any investor should like to see in the companies they buy.

Think more companies should be raising dividends? Dan Caplinger agrees -- he calls out some big-name companies that need higher dividends

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor John Rosevear has no position in the companies mentioned. Automatic Data Processing and Johnson & Johnson are Motley Fool Income Investor picks. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.