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 management services 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 management services
Below, I've compiled some of the major dividend-paying players in management services (and a few smaller outfits), ranked according to their dividend yields:
|
Company
|
Recent Yield
|
5-Year Avg. Annual Div. Growth Rate
|
Payout Ratio
|
Add to Watchlist
|
| Heidrick & Struggles International (Nasdaq: HSII ) |
2.2% |
0%* |
208% |
Add |
| Accenture (NYSE: ACN ) |
1.5% |
28.6% |
29% |
Add |
| Corporate Executive Board (Nasdaq: EXBD ) |
1.4% |
(11.6%) |
41% |
Add |
| Resources Connection (Nasdaq: RECN ) |
1.3% |
New dividend |
30% |
Add |
| Towers Watson (NYSE: TW ) |
0.5% |
0% |
10% |
Add |
Data: Motley Fool CAPS.
*Past three years.
If you focus on dividend yield alone, you might end up with Heidrick & Struggles. But it's not necessarily your best bet, with a short track record, no growth in its dividend, and a payout ratio in nosebleed territory.
You may also notice that some major players in the industry, such as Booz Allen Hamilton (NYSE: BAH ) and Accretive Health (NYSE: AH ) , aren't on the list. That's because smaller, fast-growing companies often prefer to plow any excess cash into further growth, rather than pay it out to shareholders. And companies with significant debt, such as Booz, may find it smarter to pay down debt with excess cash.
Just right
As I see it, among the companies above, Accenture and Resources Connection offer the best combination of dividend traits, sporting some income now and a good chance of strong dividend growth in the future. Accenture's steep dividend growth rate won't be sustainable for long, but its low payout ratio makes that less of an immediate concern.
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.
Remember, too, that you may find even more attractive dividends elsewhere, such as in packaged consumer goods or oil refining.
Do your portfolio a favor. Don't ignore the growth you can gain from powerful dividend payers.
To get more ideas for great dividend-paying stocks, read about "13 High-Yielding Stocks to Buy Today."
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