As earnings season nears its end many companies have, once again, raised their dividends. Yet, while we may all love dividends, how can you separate the truly great dividend stocks from the pack?

At the end of this article, I'll give you a quick tip for picking dividend stocks. First, here are three stocks with soaring dividends that you should consider today.


Image courtesy of Walt Disney Company

When you wish upon a dividend

Walt Disney (DIS 0.18%), our first name, is a good example of a hybrid stock. It can satisfy growth and value investors alike and, in my opinion, income investors should consider it too.

Disney just reported a jump in first quarter profit of 33%, led by studio growth of 75%, which is truly remarkable for a company of its size. Even with that in mind, income investors usually skip this stock's tiny 1% yield, and I think that's a mistake. 

Right now Disney simply has too many good options for capital reinvestment. With the film business growing at 75%, compared to theme parks at 6%, it makes more sense to pump cash into the newly slated releases for both Marvel and Star Wars franchises. Yet that will not always be the case. 

Give Disney the benefit of the doubt today, and you will be rewarded later. This company has stable cash generators in ESPN (34% of revenues), theme parks, and films, and when film growth slows, the dividend could easily be doubled. 

Disney raised its dividend 15% for the quarter, and I feel that's just the start, consider this stock for a long-term holding. 

Image courtesy of Dunkin' Brands

The coffee cult moves west

Dunkin Brands (DNKN), which owns Dunkin' Donuts and  Baskin-Robbins, has some rabid fans. Dunkin' raised its dividend 21% following the quarter, and the expansion of that manic fan base could lead to some tasty dividends going forward. 

In its most recent quarter, Dunkin' grew EPS 26.5% and revenue rose a whopping 13.3%; management also projected as many as 400 new stores for 2014. If you live east of Chicago, this may seem hard to believe, as there are (I believe) more Dunkin' Donuts than people in cities like Boston.

Yet the growth will come westward, and with 3.5% comps, and a new loyalty plan, this coffee cult should continue to grow. If Dunkin' can continue to grow comps with the new stores, and take some breakfast market share away from the fast-food crowd, the dividend could be going north for some time. 

The stock may not look cheap at these levels, but great brands are few and far between. This is one of them, and it's raising its dividend, so you're paying a premium price for a premium stock. 


Image courtesy of PepsiCo

Results that are sweeter than they appear

With a forward P/E around 16, and price-to-sales ratio of 1.8, you could argue that PepsiCo (PEP 3.62%) looks cheap (relative to this market) on numbers alone.

Even with a solid 6% jump in earnings, the stock has slumped a bit since reporting its results, and is nowhere near its 52 week high of $87. The reason, in my opinion, is a common misunderstanding of its business model that links PepsiCo to "Pepsi." 

Soda sales are slumping a bit in the U.S., but carbonated drinks make up less than 20% of PepsiCo's global portfolio. The is a food business, and the company has many "healthy" brands such as Naked Juice. 

Frito-Lay grew 3% for the quarter, while Quaker slumped, so I'd be more worried by Quaker's results than Pepsi's. My thought is that the operational and execution problems at Quaker are temporary, and this company has too many great brands (Gatorade, and Sun Chips to name a few) to discount.

I feel that PepsiCo's management team has done a nice job of transitioning to healthier brands; I also feel the slump in North American carbonated beverages is slightly over-blown, and PepsiCo has far less soda exposure than its competitors. In short, I think the stock looks like a good value at these levels.

PepsiCo hiked its dividend by 15% to $2.62 per share, yet its pay-out ratio is still below 60% of this years projected EPS. It projects 2014 core earnings per share to increase 7%, and the yield is now over 3%.

The market is not giving PepsiCo enough credit in my view, which is rare for a 3% yielding stock. Take a look at this one.

A tip for picking dividend stock winners

Picking dividend stocks is not as easy as it once was. Since CEO's know we love dividends, some short-sighted executives (looking at you Cisco) will raise their dividend even if their business is declining.

They do it because they want to placate us. 

So here's my dividend stock picking tip: do not let a "high yield" override your better judgement. In fact, if you find yourself saying "they ought to pay a higher dividend," that could be a clue to buy the stock. The chances are, if the company has that much excess cash flow, it will eventually agree with you.

Seek out good businesses with dividends that are set to rise in a sustainable and reasonable manner. A dividend should never seem "out of whack" with the health of the underlying business.