The Most Promising Dividends in Business Equipment

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 business equipment business 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 business equipment
Below, I've compiled some of the major dividend-paying players in the business equipment business (and a few smaller outfits), ranked according to their dividend yields:

Data: Motley Fool CAPS 

Dividend investors typically focus first on yield. Pitney Bowes (PBI 0.95%) and Diebold (DBD) are among the highest-yielding stocks in this group, with Pitney Bowes far outstripping the rest of the field. But they're not necessarily your best bets. Neither has been raising its payout at a rapid rate, for example. Postage-meter titan Pitney Bowes has been challenged by the decline of business mailings and the rise of digital communications. But it is also developing other income streams, such as software and geocoding technology that it offers many companies. In general, hefty dividends such as this one reflect a fallen stock – and, indeed, Pitney Bowes stock has averaged annual losses of 16% over the past five years.

Diebold, meanwhile, has shed much of its voting-machine business, but remains a leader in ATMs – which, like, postage meters, are threatened by digital alternatives, such as mobile payment networks. The company recently lowered its near-term projections, but things may not be as bad as they seem.

Xerox (XRX) might be the first name you think of when you hear the term "business equipment," but the company has been struggling for quite a while, with revenue growing modestly. It's changing into more of a service company, though, which bodes well, as that can deliver higher margins. Indeed, its earnings have been growing more quickly than revenue – though both fell in its latest quarter. It doesn't offer the promise of much dividend growth at the moment, though, with its payout having held steady since 2007.

Some business equipment companies, such as VeriFone Systems (PAY) and Coinstar (OUTR), 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. Credit card terminal maker VeriFone took a hit recently, when it reported some disappointing numbers. This was due, in part, to currency fluctuations and a plant fire in Brazil – which is a short-term problem. It's a promising company, though, with its higher-margin operations growing briskly.

Coinstar, meanwhile, has been posting strong, double-digit revenue and earnings growth rates, with some investors thinking the company might get bought out. Its business of renting movies via Redbox kiosks is capital-intensive compared to Netflix's (NFLX -3.92%) streaming service, but Coinstar is also offering streaming through a partnership with Verizon (VZ -0.53%), and it's developing other businesses, too, such as for coffee kiosks via a venture with Starbucks (SBUX 1.00%).

Just right
As I see it, Pitney Bowes is the most compelling dividend payer on the list, due to its outsized payout and modest dividend growth. Keep a close eye on it, as well as the company's performance, though, as sagging numbers or a dividend cut could send the stock down. Knoll merits consideration, too, as it has been raising its payout substantially after a big cut back in 2009.

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.