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4 Dividend Stock Stalwarts to Buy

They don't just cut checks — they keep writing bigger ones

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Occidental Petroleum

Occidental Petroleum (NYSE:OXY) has raised its payout sharply in recent years. In fact, the dividend has more than doubled from 88 cents (annualized) in 2007 to $2.16 today. Dividend growth over the last five years has averaged an impressive 19.7% annually.

OXY is a quality company that is a pure play on oil, so it should do well with oil prices consistently at or above $100 per barrel. The 2.2% yield is lower than GIS and CPB, but it’s still strong and appears likely to increase with future dividend hikes.

Illinois Tool Works

Illinois Tool Works (NYSE:ITW) has paid a dividend for nearly 25 years, starting at 4 cents (annualized) in 1988 and rising to $1.44 for a current yield of 2.5%. Dividend growth over the last five years has averaged 11.4% annually. If you bought the stock at the end of the first quarter in 2007, you would be up 27% including dividends versus 11% in the underlying stock.

You might not have heard of ITW’s 800 brands, but they are leaders in their markets. The company manufactures products for industries around the world, including food and beverage, construction, electronics and automotive. Sales of both cars and trucks are expected to be up this year. With autos on the road almost 11 years old on average, pent-up demand should drive consumers to buy new ones.

ITW also should become even more profitable by improving operating margins of newly acquired businesses as well as its base businesses. ITW has proven successful at this in the past. In fact, over the past 25 years, management’s strategies have yielded an average 13% compounded annual rate of return for shareholders.

Avoid Most UTES and REITs

Utilities always are popular dividend stocks. At the moment, however, I would put them in the “no growth” category that should be avoided, as there are regulatory, political and economic risks that could pressure the underlying stocks. You would think an improving economy would point to improved earnings for the utilities, but it doesn’t always flow through that directly. Another concern: The capital improvements required are immense, as our utilities are in dire need of upgrades and even overhauls in some cases.

I also would be wary of REITS in general. There are many different types, of course, and they don’t all have the same growth profile, but most deal in commercial real estate (like shopping malls and office buildings) and get their income from rents. REITS are reputable investments, but the problem is that valuations are very rich given that investors have piled into them since the market bottomed in 2009.

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