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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 waste-management 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' 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 waste management
I've compiled some of the major dividend-paying players in the waste-management industry (and a few smaller outfits), ranked according to their dividend yields.
5-Year Average Annual Dividend Growth Rate
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|Veolia Environment (NYSE: VE )||10.9%||9.5%||76%||Add|
|Waste Management (NYSE: WM )||4.3%||8.7%||65%||Add|
|US Ecology (Nasdaq: ECOL )||3.9%||4.4%||79%||Add|
|Republic Services (NYSE: RSG )||3.2%||16.7%||57%||Add|
|Progressive Waste Solutions (NYSE: BIN )||2.4%||New dividend||50%||Add|
|Waste Connections||1.1%||New dividend||21%||Add|
Data: Motley Fool CAPS.
Focusing on dividend yield alone can be problematic, if the dividends in question aren't growing at a good clip or the payout ratio is too high. None of these companies poses those concerns, though.
Focusing just on the dividend growth rate, though, can also be dangerous. Republic Services' rate, for example, is so steep that it will be hard to maintain for long. Though with its reasonable payout ratio, it still has some room to grow.
You may notice, too, that some notable players in the industry, such as EnergySolutions (NYSE: ES ) and Clean Harbors (NYSE: CLH ) , 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 -- although EnergySolutions did pay a dividend from 2008 to 2010 before suspending it around this time last year.
As I see it, among the companies discussed here, Veolia Environment and Waste Management offer the best combination of dividend traits, sporting some solid income now and a good chance of strong dividend growth in the future. Republic Services is also worth a look.
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. Veolia, for instance, carries a lot of debt. 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.