GameStop Corporation ( GME - Analyst Report ) is a beguiling option for investors seeking both growth and income. This video game and entertainment software retailer yesterday announced its decision of a dividend hike, following which the shares rose 0.5% to close at $25.50.

Up Goes Dividend

This Grapevine, Texas based company, raised its quarterly dividend by 10% to 27.5 cents (or $1.10 annually) from 25 cents a share (or $1.00 annually). The increased dividend will be paid on Mar 19, 2013, to stockholders of record as of Mar 5, 2013. The dividend yield based on the new payout and the last closing market price is approximately 4.3%.

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

In Aug 2012, the company last increased its quarterly dividend by 67% to 25 cents. GameStop 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 GameStop’s balance sheet and cash flow positions. The company ended the third quarter of 2012 with cash and cash equivalents of $366.4 million.

Closing Comment

GameStop currently holds a Zacks Rank #4 (Sell) that well indicates the stock’s dismal holiday sales performance. Holiday sales for the nine-week period ended Dec 29, 2012 dropped 4.6%, while comparable-store sales fell 4.4%. GameStop now projects comparable-store sales to decline between 4% and 7% during the fourth quarter and in the range of 7.5% to 9% in fiscal 2012. The company also restricts its fourth-quarter fiscal 2012 earnings outlook at the lower-end of the previously provided guidance range of $2.07 to $2.27 per share.