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 foreign wireless 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 foreign wireless
Dividend investors typically focus first on yield. Among foreign wireless companies, Cellcom Israel (NYSE: CEL ) and (also Israel-based) Partner Communications (Nasdaq: PTNR ) offer the respective heady yields of 10.2% and 8.9%. Such companies aren't always your best bets, though, if their dividend growth is meager or their payout ratios too steep. Cellcom and Partner don't have payout ratios to worry about, though, and dividends seem to be increasing, especially with Partner Communications. Both companies' yields are high in part because of slumping stock prices, as they've experienced revenue growth slowdowns, increased customer turnover, and pressure from competitors.
If you focus on the dividend growth rate first, you'll end up with Partner Communications and China Mobile, with five-year average annual dividend growth rates of 28.3% and 24.2%, respectively. When growth rates are so steep, they can be hard to maintain for long. These have reasonable payout ratios, though, making that far from an immediate concern.
Some companies, such as Israel-based Ceragon Networks (Nasdaq: CRNT ) , 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. Ceragon has been growing rapidly, averaging 24% annual revenue growth over the past five years and signing contracts for new orders.
As I see it, China Mobile and Partner Communications offer the best combination of dividend traits, sporting solid income now and a good chance of strong dividend growth in the future. China Mobile's current yield, at 3.6%, is much lower than Partner's 8.9%, but it has the advantage of operating within a huge and growing population.
With a yield of 6.3%, Russia's Mobile TeleSystems OJSC (NYSE: MBT ) is also worth a look, as is the U.K.'s Vodafone (Nasdaq: VOD ) , yielding 3.5%. But if you're risk averse, perhaps you should bypass Mobile TeleSystems. One reason its yield is high is because its stock is being somewhat reined in by concerns over corruption in Russia. Vodafone is appealing partly for its 45% stake in Verizon Wireless, though its stock is also being held back some due to concerns over Europe's economic woes.
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.
More Expert Advice from The Motley Fool
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock in our brand-new free report: "The Motley Fool's Top Stock for 2013
." I invite you to take a copy, free for a limited time. Just click here
to access the report and find out the name of this under-the-radar company.