Mattel (click ticker for report: MAT), the largest toy maker in the world, reported much stronger than expected second quarter earnings Tuesday morning. Though sales were roughly flat at $1.5 billion for the quarter, earnings grew 22% to $0.28 per share versus a consensus estimate that called for $0.21 per share. The impressive growth was a result of both a decreased share count and gross margins that soared 340 basis points to 51.3%.

We thought results from the toy maker were very encouraging, as a combination of price increases and lower input costs allowed the firm to grow profitability in light of competition from the iPad (click ticker for report: AAPL) and video game consoles. Mattel specifically pointed to strong sales from American Girl, which grew 3% year-over-year, and Fisher-Price, which grew sales 2%. Hot Wheels also grew 11% worldwide, while Barbie sales increased 5%. North American sales were up 1% for the quarter, but international sales fell 1%, though the latter was negatively impacted by currency.

With strong performance from its core brands in the second quarter and the ramp of Batman following the film release in late July, we think Mattel is on track for a very solid year. The firm typically builds inventory in the first half of the year, with the majority of cash flow generation coming from the holiday season. We think the company will continue to control costs slightly better, as evidenced by its strong gross margin in the second quarter, so cash flow generation could be greater than expected this year. Further, the firm will continue to pay out its quarterly $0.31 dividend, which amounts to an annualized yield of 3.7% at current levels.

Ultimately, we thought Mattel’s second quarter was very strong, and we expect positive results from competitor Hasbro (click ticker for report: HAS) as well. The Avengers and Spiderman are likely to be nearly as popular as the new Batman film, which should translate into strong sales for Hasbro—the seller of Marvel (click ticker for report: DIS) toys. Mattel’s stronger pricing indicates industrywide strength, in our view.

Although we believe Mattel will likely grow its dividend in the future, we think Hasbro is a more compelling dividend growth investment at current prices. Not only does Hasbro sport a higher annual yield (4.3% versus 3.7% for Mattel), but we also believe shares are more undervalued at current levels, offering investors a larger margin of safety. Both firms have excellent dividend growth potential, in our view, and score similarly on the Valuentum Dividend Cushion. Still, we think Hasbro has better total return potential from its current price, and we hold its shares in our Dividend Growth Newsletter portfolio.