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 national brokerage 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:

  1. The current yield
  2. The dividend growth
  3. 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 national brokerages
Below, I've compiled some of the major dividend-paying players in the national brokerage industry (and a few smaller outfits), ranked according to their dividend yields:


Recent Yield

5-Year Avg. Annual Div. Growth Rate

Payout Ratio

Add to Watchlist


BGC Partners (Nasdaq: BGCP) 6.2% New dividend 200% Add
GFI Group (NYSE: GFIG) 4% 16.9%* 225% Add
Sanders Morris Harris Group 2.4% (3.4%) 41% Add
CME Group (Nasdaq: CME) 1.8% 23.6% 32% Add
FXCM (Nasdaq: FXCM) 1.8% New dividend 2,400% Add
MarketAxess Holdings 1.5% New dividend 35% Add
Charles Schwab (Nasdaq: SCHW) 1.3% 27.3% 42% Add
TD AMERITRADE 0.9% New dividend 10% Add
Morgan Stanley 0.8% (27.3%) 8% Add

Data: Motley Fool CAPS.
*Past three years.

If you focus on dividend yield alone, you might end up with BGC Partners and GFI Group, but they're not necessarily your best bets. Their payout ratios are very high.

Instead, let's focus on the dividend growth rate first. CME Group and Schwab lead the way there, but that's partly because so many in the group have relatively new dividends, without enough of a track record to reflect much of a growth rate. Also, the growth rates of CME Group and Schwab are so steep that they may be hard to maintain for long, although their payout ratios are currently reasonable.

You may notice, too, that some familiar names in the industry aren't on the list, such as E*TRADE Financial (Nasdaq: ETFC) and Ladenburg Thalmann Financial Services (AMEX: LTS). While Ladenburg Thalmann is a relatively small company, with a market cap recently near $225 million, and E*TRADE has been valued near $4 billion, both are busy growing and would rather apply any excess cash to that growth than pay it out to shareholders.

Just right
As I see it, among the companies above, CME Group offers the best combination of dividend traits right now. Others bear watching, too, though, such as BGC Partners and GFI Group. They offer solid yields now, and might offer strong dividend growth in the future. Consider looking elsewhere, too, such as other industries or even dividend ETFs.

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.