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 gas utilities 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 gas utilities
Among gas utilities, looking for high yields might lead you to grab Transportadora de Gas Del Sur S.A., as it seems to have a yield of... 52%! But a closer look shows that it paid an unusually high dividend last spring, with typical yields closer to 1%-2%. Niska Gas Storage Partners (NYSE: NKA ) might also draw your attention, with its 15% payout. But it has only been paying a dividend since 2010, and hasn't upped it since it began, as well. Its stock is down more than 50% over the past year, too, and if it ends up having to cut its dividend, the stock could fall more.
Instead, let's focus on the dividend growth rate first, where National Grid (NYSE: NGG ) leads the way, with a five-year average annual dividend growth rate of 36%. Its future growth rate is likely to be much lower, though, as the company has projected a 4% increase next year, and future increases have yet to be determined. Still, its recent 4.3% yield is solid enough that a slower growth rate can be OK. The company is updating its infrastructure and offers a dependable revenue stream.
Energen and Southern Union, with dividend growth at 15% and 14%, respectively, are also appealing, but with yields of 1.1% and 1.4%, it will take a while for their payouts to reach compelling levels. ONEOK's (NTSE: OKE) growth rate of 11% may be less fetching, but its recent yield of 3% gives it a head start over the likes of Energen and Southern Union. The natural gas transportation and storage leader has a promising future, as demand for gas grows.
Some gas companies, such as Clean Energy Fuels (Nasdaq: CLNE ) , 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. Clean Energy has many investors excited, since it specializes in natural-gas fueling stations and the relatively low price of gas is likely to boost interest in natural-gas fleets. But building gobs of stations will be costly, and the company has been operating in the red lately.
As I see it, Suburban Propane Partners (NYSE: SPH ) offers the best combination of dividend traits, sporting significant income now and solid dividend growth in the future. It's not exciting, but stability has its appeal. The stock recently yielded 7.7%, and the company has been upping its payout by close to 6% annually in recent years. You might look into other contenders, as well, such as National Grid, ONEOK, or even TransCanada. They also offer solid dividends.
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.