Dividend payers deserve a berth in any long-term stock portfolio. But seemingly attractive dividend yields are not always as fetching as they may appear. Let's see which companies in the brokerage industry offer the most promising dividends.
Yields and growth rates and payout ratios, oh my!
Before we get to those companies, though, you should understand just why you'd want to own dividend payers. These stocks can contribute a huge chunk of growth to your portfolio in good times and bolster it during market downturns.
As my colleague Matt Koppenheffer has noted: "Between 2000 and 2009, the average dividend-adjusted return on stocks with market caps above $5 billion and a trailing yield of 2.5% or better was a whopping 114%. Compare that to a 19% drop for the S&P 500."
When hunting for promising dividend payers, unsophisticated investors will often just look for the highest yields they can find. While these stocks will indeed pay out the most, the yield figures apply only for the current year. Extremely steep dividend yields can be precarious, and even solid ones are vulnerable to dividend cuts.
When evaluating a company's attractiveness in terms of its dividend, it's important to examine at least three factors:
- The current yield
- The dividend growth
- The payout ratio
If a company has a middling dividend yield, but a history of increasing its payment substantially from year to year, it deserves extra consideration. A $3 dividend can become $7.80 in 10 years, if it grows at 10% annually. (It will top $20 after 20 years.) Thus, a 3% yield today may be more attractive than a 4% one, if the 3% company is rapidly increasing that dividend.
Next, consider the company's payout ratio, which reflects what percentage of income the company is spending on its dividend. In general, the lower the number, the better. A low payout ratio means there's plenty of room for generous dividend increases. It also means that much of the company's income remains in its hands, giving it a lot of flexibility. That money can fund the business's expansion, pay off debt, buy back shares, or even buy other companies. A steep payout ratio reflects little flexibility for the company, less room for dividend growth, and a stronger chance that if the company falls on hard times, it will have to reduce its dividend.
Peering into brokerage companies
Looking for high yields would lead you to BGC Partners (Nasdaq: BGCP ) , among national brokerage-related companies, as it recently yielded a whopping 8.8%. But it's not necessarily your best bet, as its payout ratio is very steep, and its earnings and dividend rate have been a bit bumpy in recent years.
Instead, let's focus on the dividend growth rate, where GFI Group and CME Group (Nasdaq: CME ) lead the way, each with a five-year average annual dividend growth rate of 12.5%. GFI Group, yielding around 5.4%, has been sputtering financially, though, recently posting a quarterly net loss -- when the company had predicted a profit. CME Group, though, is performing well. It recently yielded 3.2% and sports fat profit margins. Bulls like its asset-light business and competitive advantages.
Some brokerages, such as Ladenburg Thalmann Financial Services (AMEX: LTS ) and E*TRADE Financial (Nasdaq: ETFC ) , don't pay dividends at all. That's because smaller or fast-growing companies often prefer to plow any excess cash into further growth, rather than pay it out to shareholders. Ladenburg Thalmann posted negative earnings for a few years during and after the financial crisis, although it managed to earn a small profit in 2011. Its gross margins have improved, too, and insiders have been buying. E*TRADE has been busy improving its financial health, and stands to benefit as the stock market eventually heats up again and investors place more orders. Some were looking for the company to put itself on the block, but E*TRADE resisted that idea.
As I see it, CME Group offers the best combination of dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future. You might also want to take a closer look at BCG Partners and GFI Partners, to see if you find their risks outweighed by their significant yields. MarketAxess Holdings (Nasdaq: MKTX ) is also worth a look. Its recent 1.3% yield is on the low side, but it has been upping its payout briskly over the past two years. It recently posted estimate-beating earnings, and there was speculation last year that the company might sell itself.
Of course, as with all stocks, you'll want to look into more than just a company's dividend situation before making a purchase decision. Still, these stocks' compelling dividends make them great places to start your search, particularly if you're excited by the prospects for this industry.
Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.
Looking for some All-Star dividend-paying stocks? Look no further.