(MONEY Magazine) – Investors know all too well that today's stock dividends are lousy. The typical Dow Jones industrial stock yields less than 2%--the stingiest payout since Charles H. Dow dreamed up the 30-stock average in 1896.

You might be surprised, then, to learn that dividends actually soared last year. "Historically, companies have raised dividends an average of 6% a year, but last year dividends went up more than 13%," says Geraldine Weiss, editor of La Jolla, Calif. newsletter Investment Quality Trends ($275 a year; 619-459-3818).

Moreover, in 1996 the number of U.S. firms increasing their dividends climbed to 2,171, the most in 16 years, according to Standard & Poor's. "Dividends are catching up to the double-digit annual earnings gains of the past five years," says Arnold Kaufman, editor of S&P's weekly Outlook newsletter ($298 a year; 800-852-1641).

How can yields be scrawnier than a Calvin Klein model when dividends are bursting their seams? Simple: Share prices have reached unsustainably high levels. (For a detailed analysis of today's market, see In Your Interest on page 76.)

Looking longer term, however, the recent dividend data amount to welcome news. "Since 1925, dividends have accounted for almost half of the 10.7% average annual return on stocks," says investment strategist Elizabeth J. Mackay at Bear Stearns in New York City. So the more likely a company is to boost its dividend, the higher the return its shareholders can expect to earn.

Two 1996 studies bear this out. After analyzing 50 of the largest U.S. stocks from 1967 through 1995, Prudential Securities quantitative analyst Melissa R. Brown concluded: "If you had to rely on a single strategy to pick superior big stocks, looking for above-average dividend yields would be the best." Similarly, a Sanford C. Bernstein study of large-company stocks found that between 1964 and September 1995, firms that raised their dividends beat the market by two percentage points over the next 12 months.

So the trick for today's investors is to identify stocks with strong prospects of dividend hikes. We screened 7,886 stocks for ones that had annual sales of more than $1 billion, a price/earnings ratio below 20, a yield above 2%, projected dividend growth of at least 7% a year and a top financial rating (the last two according to the Value Line Investment Survey). After weeding out companies that smart analysts frowned on for various reasons, we ended up with the 10 stocks in the table above.

Three of them--medical-equipment producer C.R. Bard, defense contractor General Dynamics and auto-parts distributor Genuine Parts--were considered the best values. But it's worth taking a look at all 10. Their financial strength and growing dividends will likely support prices if the market turns down. Better yet, since share prices generally rise in line with dividends, over a decade or so they look like winners. Assuming at least 7% growth, they could deliver double-digit average annual returns for as far as the eye can see.

ALL DATA AS OF JAN. 30

Wall Street editor Michael Sivy is a chartered financial analyst and a former Wall Street research director.