* U.S. non-farm payrolls surge in October
* Shares of financials lead gains
* Stocks: Dow flat, S&P up 0.3 pct, Nasdaq flat
* For up-to-the-minute market news see [STXNEWS/US] (Updates to morning)
By Caroline Valetkevitch
NEW YORK, Nov 5 (Reuters) - U.S. stocks edged higher on Friday after stronger-than-expected U.S. job gains in October, with financials leading market gains on speculation they would increase dividend payments in the future.
Gains were limited by profit-taking after a rally to two-year highs in the wake of the Federal Reserve's announcement Wednesday to buy $600 billion in government bonds to help the ailing economy.
Investors were looking to see if the rally could continue after the week's market-bullish events.
"The market has had some good news here lately... This (data) also suggests some re-acceleration, so I think it might mean the soft spot is over, and the stock market could pierce those 2010 highs and stay above them," said John Canally, investment strategist and economist at LPL Financial in Boston.
The Dow Jones industrial average <.DJI> was up 3.90 points, or 0.03 percent, at 11,438.74. The Standard & Poor's 500 Index <.SPX> was up 4.43 points, or 0.36 percent, at 1,225.49. The Nasdaq Composite Index <.IXIC> was up 0.22 points, or 0.01 percent, at 2,577.56.
On Thursday, the Dow and S&P 500 hit their highest levels since September 2008, while the Nasdaq rose to its highest since January 2008. The S&P 500 now is up about 16 percent since the end of August.
Republican gains in the U.S. midterm election on Tuesday added to bullish sentiment in stocks, as investors viewed the change as positive for profit growth.
Financials on Friday were substantially outperforming other sectors, with the S&P financial index <.GSPF> advancing 2.7 percent. The Fed is expected to soon allow some healthy banks to increase payments, people familiar with the decision said late Thursday.
Shares of Bank of America
Boosting optimism about the economy, U.S. employment jumped by much more than expected last month, with private companies hiring workers at the fastest pace since April, the government report showed. For details, click STORY: [ID:nN04265378] TABLE: [ID:nLLA5ME68F]
The strength of the report even raised questions about whether the Fed was too aggressive in its move to keep the economy growing.
"That employment report was really good today. Is there justification to buy $900 billion (in total) in debt?," said Thomas Villalta, portfolio manager for Jones Villalta Asset Management in Austin, Texas.
"I don't think it hurts for the Fed to be doing what they're doing if it acts as an insurance policy that we're on track," he said.
But the unemployment rate remained high at 9.6 percent in Friday's report, signaling the labor market still has far to go, he said. (Reporting by Caroline Valetkevitch; Additional reporting by Angela Moon; Editing by Kenneth Barry)