Limited Brands Inc. ( LTD - Analyst Report ) is an interesting option for investors seeking both growth and income. This specialty retailer of women’s intimate and other apparels yesterday announced its decision of a dividend hike, following which the shares of this Zacks Rank #3 (Hold) rose 0.4% to close at $47.42.

Dividend Raised

The Columbus, Ohio-based Limited Brands raised its quarterly dividend by 20% to 30 cents (or $1.20 annually) from 25 cents a share (or $1.00 annually). The increased dividend, which is the 153^rd successive quarterly payout, will be paid on Mar 8, 2013, to stockholders of record as of Feb 22, 2013. The dividend yield based on the new payout and the last closing market price is approximately 2.5%.

The news of the dividend hike reflects Limited Brands’ plan of utilizing free cash to enhance shareholders’ return, thereby boosting investors’ confidence in the stock.

In Jan 2012, the company last increased its quarterly dividend by 25% to 25 cents. Again, on Dec 10, 2012, Limited Brands announced a special dividend of $3.00 per share, which was paid on Dec 26, 2012 to shareholders of record as on Dec 20, 2012.

Limited Brands has been actively managing its cash flows and returning much of its free cash to shareholders via dividends, while maintaining a healthy balance sheet and credit ratios that are necessary for an investment-grade rating.

Other companies, which recently increased dividend, include Family Dollar Stores Inc. ( FDO - Analyst Report ) , by 23.8% to 26 cents, The McGraw-Hill Companies, Inc. ( ) by 9.8% to 28 cents, and BB&T Corporation ( BBT - Analyst Report ) by 15% to 23 cents.

Role of Dividend

Dividend hikes not only enhance shareholder’s return but raise the market value of the stock. Through this strategy, the companies bolster investor confidence on the stock, thereby persuading them to either buy or hold the scrip instead of selling them.

Looking ahead, the company remains confident of its growth potential, suggesting enhanced value for shareholders via dividend payout as well as share buybacks.

A dividend hike primarily reflects the company’s sound financial position and defined future prospects. This is quite evident from Limited Brands’ balance sheet and cash flow positions. The company ended the third quarter of 2012 with cash and cash equivalents of $547 million. Management expects to generate free cash flow of $750 million during fiscal 2012.

Closing Comment

Limited Brands’ inventory management, and merchandise initiatives have kept it afloat in a sluggish consumer environment. The company’s Bath & Body Works segment is gaining traction, driven by a rise in store transactions, enhancement in the direct channel business and growth in new stores.

Victoria’s Secret Stores have been performing well, and the company is also revamping its La Senza brand. But stiff competition and erratic consumer behavior are still matters of concern. Moreover, the company’s top line is struggling.