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 air delivery and freight 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 air delivery and freight
Dividend investors typically focus first on yield. United Parcel Service (NYSE: UPS ) leads the way in that department among sizable air delivery and freight companies, offering 3.0%. But that dividend hasn’t been growing extremely rapidly, averaging 6% annual growth over the past five years. On other fronts, though, the company looks great, recently gobbling up TNT Express to boost its presence in Europe.
Instead, let's focus on the dividend growth rate first, where rival FedEx (NYSE: FDX ) impresses, with an average annual growth rate of nearly 18%. But that’s not perfect, either, as FedEx’s yield has recently been about 0.6%, meaning that it can take some years to reach a significant level. It, too, has been growing via acquisition, with purchases announced in Poland, Brazil, and France. Some are interested to see whether FedEx and UPS will be able to cut their pilot costs significantly by using unmanned airplanes. It seems far-fetched, but if you’d like to learn more, look up AeroVironment (Nasdaq: AVAV ) , which already has contracts with the military and could boost its business even more if civilian companies start ordering drones.
Some air delivery and freight companies, such as Air Transport Services Group (Nasdaq: ATSG ) , 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. With a market capitalization near $300 million, Air Transport focused on domestic deliveries, so it has escaped some of the downward pressure that Europe’s problems have put on companies such as FedEx. Its revenue and earnings growth have been negative recently, and the stock has been downgraded by some on Wall Street.
As I see it, UPS offers the best combination of dividend traits, sporting some significant income now and a good chance of solid dividend growth in the future. If you’re willing to take lower income now in exchange for faster dividend growth, look into Expeditors International (Nasdaq: EXPD ) , with a yield near 1.5% and a growth rate of 14%. It doesn’t seem to be a super bargain at the moment, but it’s poised to perform well as the global recovery heats up and shipping volume increases.
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.
These are not your only options, of course, if you’re seeking big dividend yields. Check out our special free report right now: "Secure Your Future With 9 Rock-Solid Dividend Stocks."