How Much Further Can Dividends Rise? 3M Co (MMM), Wells Fargo & Company (WFC)

Investors are hungrier than ever for dividend stocks, and the feeding frenzy shows no sign of slowing down. Rather, as the stock market soars toward all-time highs, the more important question is whether dividend increases can keep up the pace.

So far, the answer seems to be yes. After huge dividend increases in 2012, dividend-paying stocks are off to a good start in the new year. Moreover, all signs point to companies having plenty of capacity to raise their payouts in the future — as long as they actually want to pay more.

Forget the fiscal cliff
In 2012, the market set all sorts of new dividend records. According to data from S&P Dow Jones Indices, companies paid $281.5 billion in dividends during 2012, up 17% from the previous year and handily beating the previous record of around $248 billion set back in 2009. Nearly 2,900 companies raised their payouts last year, which was also a record high since the company started tracking dividend increases.

Some skeptics might argue that the rise in dividend payments came largely because of concerns over the fiscal cliff and the rush among companies to accelerate dividends into the 2012 tax year to take advantage of favorable rates. As it turned out, the worst-case scenario didn’t play out for dividend taxation, as the compromise that lawmakers reached set a maximum tax rate of 20% on dividend income, well below the top 39.6% rate that would have applied under previous law.

Yet even with the higher rate, companies haven’t hesitated to boost their payouts. Consider these recent examples:

• Just yesterday, 3M Co (NYSE:MMM) raised its payout by 8%, extending its streak of rising dividend payouts to 55 years. With the rise, 3M shares now yield 2.5% despite trading at all-time highs.
• Last week, fertilizer company Potash Corp./Saskatchewan (NYSE:POT) pushed its dividend higher by a more substantial 33%, raising its yield to 2.6% and marking the fourth increase in its payout in two years. With healthy conditions in the fertilizer market and a just-concluded deal to export more potash to China, PotashCorp was in a good position to reward shareholders.
• Wells Fargo & Company (NYSE:WFC) hiked its dividend last month by 14%, making its annual payout an even $1 per share and pushing its yield closer to the 3% mark. Wells Fargo is just one of many banks that have gradually raised their dividend payouts as they’ve recovered from the financial crisis.

Payout increases are good news for investors, but how long can the good times last? Despite worries, many dividend experts are bullish about the prospects for future payout growth.