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 agricultural chemicals 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 agricultural chemicals
Terra Nitrogen (NYSE: TNH) is one of the highest-yielding stocks among agricultural chemicals by far, offering 7.8% recently. But focusing on dividend growth rates, CF Industries and PotashCorp (NYSE: POT) lead the way, with five-year average annual dividend growth rates of 54% and 46%, respectively. Such steep growth rates may look unsustainable, but with current yields around 1%, the real concern is that it'll take a while for the payouts to reach attractive levels. It helps when the company is performing well -- PotashCorp, for example, has been expanding its mines and upped its revenue and earnings over the past year by more than 60%.

Some agricultural chemicals companies, such as Rentech (AMEX: RTK) and China Green Agriculture (NYSE: CGA), 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. Rentech, for example, generates solid revenue from its nitrogen business, but it's also busy investing heavily in biofuels. China Green Agriculture has been growing aggressively, too, introducing new products, and is poised to benefit from China's growing needs for fertilizer. It's struggled some with rising production costs, though.

Just right
As I see it, Terra Nitrogen offers the best combination of dividend traits, sporting hefty income now and a good chance of strong dividend growth in the future. The company expects to benefit from a surge in corn planting in 2012, and enjoys a lower production cost than potash-focused rivals. Many other companies in the industry are worth a look, too, such as Mosaic (NYSE: MOS). Its dividend is relatively new and puny, but that could change. It sports low debt, rapidly growing revenue and earnings, and was recently added to the S&P 500.

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.