6 Stocks With Improving Dividends

There's mixed news for dividend fans. Standard & Poor's reckons the dollar amount of payments underlying its 500-stock index will plunge 10% in the fourth quarter, the biggest drop since 1958. Yet more than half of companies will pay out more this year than last.

That's partly because companies doing the cutting -- especially banks -- had big dividends to begin with. In September and October, 16 financial companies cut payments by a total of $14.6 billion. There's good reason for investors to focus attention on companies that steadily increase dividends. S&P's "Dividend Aristocrats" -- 60 companies that have raised payments in each of the past 25 years -- have outperformed the 500 index year-to-date by almost 12 percentage points.

Garmin (GRMN) is no dividend aristocrat. Not quite 20 years old, the Olathe, Kan., maker of satellite-based navigation gear has paid dividends only since 2003. It distributes payments once a year instead of each quarter. Early payments were puny. The 25 cents a share (split-adjusted) that Garmin paid in late 2003 worked out to a yearly yield of less than 1%. By August 2007 Garmin had tripled its payment, but its stock price had swollen fourfold, so the yield was even skimpier.

Since then shares have tumbled from more than $100 to less than $19. In June Garmin announced it will pay another 75 cents a share on Dec. 15. That puts the stock's yield at a suddenly sizable 4%. Moreover, shares fetch just five times earnings.

The battered price suggests challenges, and Garmin faces some big ones. It makes money from direction-finding watches, handheld devices, boat and aircraft consoles and, through partnerships with Research in Motion's (RIMM) BlackBerry and the like, smartphones. But the growth in car units dwarfed everything else from 2003 until recently. Last year two-thirds of sales were owed to car gear, like Garmin's popular Nuvi line. This year, car makers and dealers are facing the worst sales slump in decades. At the same time, new competition, notably from Amsterdam's Tom-Tom, has crimped pricing power and profit margins. As a result, Wall Street expects per-share profits for Garmin to fall 2% this year.

The overall market for direction-finding services, though, especially on smartphones, is growing fast. Gartner, an industry forecaster, expects spending on location-based services to top $8 billion in 2011, up from $1.3 billion this year. Garmin is expected to introduce its own phone, called the NuviPhone, in late 2009. After a string of delays, and the introduction of navigation features on other phones, analysts aren't optimistic over Garmin finding success with its own handset. But if it can continue to convince other handset makers and wireless carriers to offer its location services on their phones, it may prosper just the same amid an ongoing shift of navigation services from the top of the car dash to the pocket.

A quarterly dividend would surely suit shareholders more than Garmin's yearly one, but at least payments look affordable. The company has no debt and generates enough free cash each year to fund three years' worth of 75-cent dividends. For investors betting on further growth in navigation services once consumers find their way back to stores, Garmin shares look like a good deal.

Garmin turned up recently on a search for companies that have increased their payment in recent years and that look cheap relative to free cash flow. Have a look if you like at all six screen survivors.

• Past year dividend growth greater than 10%
• Ten-year average dividend growth greater than 10%
• Price/free-cash-flow ratio below 20
• Dividend yield greater than 3%