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

What a company can pay
In the end, a company’s ability to pay dividends depends on its being able to obtain cash to make those payments. Although some companies finance their dividends through debt or by making secondary offerings of stock, ideally, you want companies that can earn the money they pay in dividends.

Corporate earnings have moved to extremely high levels lately, as profit margins have improved substantially. With wage pressures minimal due to high unemployment, more of the growth that companies produce has fallen to their bottom lines, benefiting shareholders.

The result of those trends is that even with massive dividend increases, companies are paying out less of their earnings than usual. S&P Dow Jones Indices pegs the overall payout ratio at about 36%, well below long-term average levels of 52%. For 3M, Wells, and PotashCorp, all three are paying less than half their earnings out as dividends.

Put another way, if companies wanted to match the amount they traditionally return to shareholders, they would have to do an instant dividend increase of nearly 45%. That surge would push total dividend payments above the $400 billion mark and lead to a lot more income for stock investors.

Watch for dividends
Overall, the trend toward higher payouts bodes well for dividend investors. For those who prefer diversified exposure, dividend ETFs SPDR S&P Dividend (NYSEARCA:SDY) and Vanguard High Dividend Yield (NYSEARCA:VYM) should continue to reward their shareholders with rising income. As long as corporate profits stay healthy, the fundamentals behind rising dividend payouts will remain intact.

The article How Much Further Can Dividends Rise? originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger owns warrants on Wells Fargo. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends 3M and Wells Fargo. The Motley Fool owns shares of Wells Fargo.

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