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


Recent Yield

5-Year Avg. Annual Div. Growth Rate

Payout Ratio

Terra Nitrogen (NYSE: TNH) 4.8% 28.0% 79%
Sociedad Quimica y Minera (NYSE: SQM) 1.0% 35.2% 20%
CF Industries (NYSE: CF) 0.3% 38.0% 13%
PotashCorp (NYSE: POT) 0.2% 16.5% 8%
Mosaic (NYSE: MOS) 0.2% New dividend 5%
Agrium (NYSE: AGU) 0.1% 0.4% 2%

Data: Motley Fool CAPS.
*Over past three years.

If you focus on dividend yield alone, you'd have little choice but Terra Nitrogen, but you shouldn't stop there. After all, its growth rate is too steep to maintain for long, and its payout ratio is nearing lofty territory.

Instead, let's focus on the dividend growth rate, where CF Industries might draw your attention. However, its current yield is so low that it will take quite a while to grow significantly. Note that in this industry, many players have bumpy dividend histories, with growth occurring only in a jagged line.

Just right
As I see it, Sociedad Quimica y Minera is the most promising long-haul prospect in this bunch. Its yield is rather small right now, but it's growing at a rapid pace, with plenty of room to for further expansion. For significant yield right now, and the chance of further (albeit possibly slowing) growth, Terra Nitrogen is also worth considering. 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.