Among the many benefits of dividend investing can come from the compounding effect. When investors reinvest their dividends, they passively buy more shares, increasing future dividend payouts. This cycle increases an investor’s total return annually and over time. This is a key reason for investors to look for dividend stocks with rising dividends.  

This isn’t to say that dividend yield isn’t important. Investors should also pay close attention to the company’s payout ratio. The two of these ratios put together say a lot about the sustainability of a dividend. But finding dividend stocks with payout hikes should be seen as an “in addition to” rather than an “or.” In fact, many of the top dividend stocks combine an attractive yield with a rising dividend.

We’re only in early May, but already some solid dividend-paying stocks such as Home Depot (NYSE:HD), Johnson & Johnson (NYSE:JNJ), and PepsiCo (NASDAQ:PEP) have increased their dividend payouts. Johnson & Johnson and Pepsi are dividend kings, which means they have increased their payouts for at least 50 consecutive years.

Who else may be increasing their dividend? This article will highlight three dividend stocks with upcoming payout increases in 2023. Each of these stocks are also good candidates for investors looking for buy-and-hold candidates in a volatile market.

Microsoft (MSFT) 

First on this list of dividend stocks with rising dividends is Microsoft (NASDAQ:MSFT). The tech sector has been volatile, but MSFT stock is up 16% in the last month. And the company delivered a strong earnings report in April that included record revenue of over $52 billion.  

Microsoft is a good example of a company that isn’t resting on its previous success. The company’s software business began its cloud computing division. The company may have been rebuffed in its effort to acquire Activision Blizzard (NASDAQ:ATVI), but it’s still a key name in gaming.

And in 2023, the company will be one of the preeminent names in artificial intelligence (AI). The company has multiple revenue streams that set the company up for future growth. Plus, investors considering MSFT stock as part of their portfolio shouldn’t overlook the company’s rock-solid balance sheet. That includes $57.5 billion in free cash flow that the tech giant logged in the last 12 months.

 All of this points to sustainable long-term growth. And that growth will be more than enough to fund – and increase – the company’s dividend.  

Microsoft has increased its dividend for the last 20 years. And if history repeats itself, as it’s likely to do, shareholders can expect an increase when the company reports first-quarter earnings for fiscal year 2024 in September 2023.

Target (TGT) 

In volatile markets, it’s important to buy the best and forget the rest. Target (NYSE:TGT) is considered one of the best names in the retail sector. One reason for investors to believe in TGT stock in this flight to quality is the reliability of its dividend.

Target is a dividend king that has increased its dividend for the last 51 consecutive years. There’s been a recession or two in that time. Yet Target has continued to reward shareholders. That speaks to the strength of its balance sheet.

And why am I confident that this time will be the same? Target is sitting in a sweet spot with consumers. The company already enjoys a cult-like following. But as the economy weakens, it is attracting some consumers who are trading down. It’s also attracting some dollar store shoppers who are finding they can do all their shopping at Target.

The company’s dividend payout ratio is over 70%, which is considered high. But analysts are expecting a sharp increase in earnings in the next year, which should easily support another dividend increase.

Caterpillar (CAT) 

The last stock on this brief list of dividend stocks with rising dividends is Caterpillar (NYSE:CAT). The iconic manufacturer of heavy equipment stands to benefit from the Infrastructure Act passed in 2022. That money is just beginning to flow into the economy, which sets the company up for strong growth.

The company delivered a solid earnings report in April. But investors are balking at the company’s weaker guidance for the rest of the year. That’s being reflected in the CAT stock price, which is down 10% in 2023.

But this is an article that’s pointing you toward quality dividend stocks for the long haul. Caterpillar fits that category nicely. The company has increased its dividend for 30 consecutive years. This puts it in the dividend aristocrat category. And if history is a guide, anticipated earnings growth will ensure that the company will increase its dividend when it reports earnings in July.

On the date of publication, Chris Markoch held a LONG position in TGT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.